Goldman Sachs Revises Its Gold Forecast Upwards

Change Comes Just Weeks After Initial Forecast

Goldman Sachs is among the latest to go long gold amid a re-emergence of interest in defensive assets. A few weeks ago, the bank updated its gold forecast for 2019, from $1,350 to $1,425, citing risk aversion as the primary reason.

Now, in a more recent interview, Goldman's global head of commodities research Jeffrey Currie reiterated the bank's forecast with an upgrade. According to Currie, fears that another recession is around the corner could be a key driver behind gold's outperformance this year.

Although the markets, for the most part, retain the image of stability, numerous analysts have stated that a crisis could be brewing. The threat of stagnant growth in both the U.S. and Europe is ever-looming, and central bank policies have likewise done much to reinforce concerns.

Many have pointed out that nearly every U.S. hiking cycle has ended in a recession, and the Federal Reserve now appears to be slowly putting the wrap on a tightening cycle that started in 2015. The Fed appears to have been rushed along by equity downturns and other red flags, which are a recessionary concern of their own. To top it off, numerous central banks around the world are aiming to tighten monetary policy in the near future.

Currie highlighted the recent central bank bullion purchases, noting that the resulting "wealth effect" is enough to push gold prices to $1,425. Last year, the Indian government took cues from its people as it re-entered the gold market with a 70-ton purchase. Chinese bullion buying is also expected to intensify moving forward.

This is on top of standard buyers like Russia, Kazakhstan and Turkey, whose regular purchases act as perpetual support for gold prices. Bart Melek, head of global strategy at TD Securities, said that central bank gold holdings grew by 3,900 tons, or 13%, since 2009. The forecast that reserves will expand by another 800 tons in the next two years could push gold past the already-bullish expectations, said the strategist.

In his report, Melek explained that central banks are looking to diversify away from the U.S. dollar as the global market faces the prospect of another superpower in China. Melek thinks India's economy is another one to look out for, and the strategist believes the densely-populated nation could soon become a major player on the global scene.

Currie said that rising geopolitical tensions are another reason why central banks are looking for protection. Out of the various flare-ups, the U.S.-China trade standoff could prove to be the most beneficial for bullion due to the inflationary implications of the conflict.

Goldman's stance that long gold is the best commodity play is unsurprising, as the metal continues to outperform both equities and other commodities. Building up on the bank's previous forecast of $1,425 an ounce, Currie now sees gold reaching $1,450 sometime this year.

How Gold Could Fix Turkey's Currency Issue

Forbes' Steve Hanke believes gold could make the Lira a worthwhile currency.

According to Forbes contributor Steve Hanke, Turkey's currency continues to serve as its country's Achilles' heel. Despite the Turkish president's political maneuvering, Hanke claims in a recent article that there is no hiding the truth from the Turkish people: the lira is effectively a junk currency and a bad choice of wealth storage.

In the article, banking data shows up to 70% of deposits in Turkey are made in a foreign currency. The lira has been on a declining trajectory since 2008, and the Central Bank of Turkey was forced to replace its diminishing foreign assets with lira denominations, further complicating affairs.

Hanke believes that, in order for the country and its President to yield real power, these rampant currency issues need to be fixed. And despite the extent of Turkey's currency struggles and the length of time that they stretch, the solution might be a simple one.

The lira could be made into a worthwhile currency, says Hanke, by attaching a gold standard to it. Although some show no recollection of it, Hanke reminds us that gold was a central part of money until the 20th century, owing in no small part to its ability to preserve purchasing power.

Ever since gold was abandoned by the official monetary system, the article states that there have been calls to restore it to its former role, with some predicting that the yellow metal is bound to return. To Hanke, the most infallible way of using gold to back Turkey's economy is in the form of currency boards.

These boards have existed in some form in over 70 countries and, when applied correctly, allowed for increased financial discipline and higher growth as opposed to a system revolving around central banks.

The article reads that, for optimal effect, the currency board would be stationed in Switzerland to improve regulation, and its purpose would be to issue notes and coins wholly backed by gold reserves. Furthermore, the issued currency would be convertible to gold by Turkey's citizens upon request and without fee.

Independent from Turkey's politics, Hanke's proposed board would alter the country's everyday financial dealings without assuming the burden of the government's obligations. And, so as to remove any doubt over bullion coverage, the physical gold tethered to the board's denominations would be held in an internationally-certified gold warehouse or a similar institution.

With the added flexibility of choosing whether the currency board would be government-run or private, Hanke believes that Turks would have an all-encompassing way of returning to a system that is proven to create more stable and organized economies.

Why Gold Prices Took a Hit Last Week

Gold prices hit their lowest levels in five years last week, trading below $1,100. What was the real driving factor behind the price's decrease?

Without a doubt, many will use recent developments in the global economy as an excuse. The Grexit no longer looks like a certainty thanks to a bailout of questionable sustainability. China's gold cravings seem to be lesser-than-usual. There's also the looming threat of an interest rate hike and a subsequent strengthening of the dollar.

Yet, upon further examination, none of these seem to be the guilty party that sent gold plummeting. China's gold demand is strong despite day-to-day deviations, and the U.S. rate hike isn't nearly as 'around the corner' as many believe. Most importantly, perhaps, gold is fundamentally different from other commodities, having different demand drivers.

Instead, Mining.com's Frik Els points out two recent events that he refers to as a 'one-two punch that floored gold price'; one from the U.S. and one from China.

Els argues that the U.S.'s part in gold's fall came via speculators in the Commodity Futures Trading Commission slashing their net-long positions, with managed-money accounts significantly reducing their exposure to gold futures. Many of these sales came as a result of uncertainty regarding the direction that the gold market is heading in.

Similarly, Els notes that China played its part by performing a massive gold sale worth $2 billion in just a matter of minutes. Due to its size, the Monday Shanghai Gold Exchange sale of 4.7 tons immediately caused gold to drop by 4.3 percent – gold sales usually average no more than 96 kilograms a minute on the SGE.

Els adds that these seemed an "almost concerted cross-continental effort to push price through support levels that the metal has bounced off numerous times before." Yet despite these drawbacks, gold still managed to bounce back to $1,100 almost immediately.

While such falls in the price of gold are universally viewed as negative, many buyers still see them as little more than a buying opportunity. As gold fell by over 3 percent in both India and Turkey, consumer interest in these markets grew – the metal's low correlation with other assets makes it ideal as a safety-net investment to diversify one's portfolio.

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