Goldman: "Factors Point to Gold at $2,150 in Twelve Months Time, Our New Target"
with bonus material
A week ago we were fortunate enough to do a read-through of the latest Bank Gold report which was discussed that Sunday with Founders. Yesterday we posted an article on Zerohedge outlining the recent Goldman report. Here it is again with some bonus content for GoldFix subscribers. enjoy
Over the weekend we reported that Goldman Sachs had recently put out a report on Gold for 2022 to their clients. The report is dated January 26th. The Market Ear also put a nice comment on the vampire squid story out after their own bullish call on Gold here. Here is our own analysis.
In that report the bank revised its outlook on the yellow metal upwards to a target price of $2150 in 12 months time. They sited the slowing US economy as a reason investors will use Gold as a low volatility inflation hedge.
Based on the expected slowdown in the US economy and the increase in recession concerns, the build in gold ETFs should increase to an annual pace of 300 tonnes by end of 2022.
They went on to add EM economics as another driver for their new target price. They asserted that when combined with a 10% forecasted increase in EM dollar nominal GDP, saying this info "points to a gold price of $2,150/oz in 12 months’ time, which is now our new target". So what did Gold do January 26th?
On the report date Gold futures closed on Globex at $1818.80 down a whopping $33.70 from the previous day’s close of $1852.50. The next 2 days Gold continued to decline, shaving another $32.20 off its price settling at $1786.60 after touching as low as $1780.60. That selloff can be attributed to the Fed Meeting coming in very hawkish on rates as well as the February contract rollover.
Those in the community who like to poke fun at Goldman’s recommendations are having a good laugh for sure. But that is premature. Goldman has a habit of making commodity recommendations that seem laughable on the face of it to grizzled veterans. If you check back later on many of their calls however, they’ve done pretty well for clients. Oil this past year is one that comes to mind.
Why Buy Gold Now?
Goldman goes on to list the reasons why they are bullish. First they explain why they were less than accurate on Gold for 2021. They first remind us that Gold was hurt by strong US markets combined with weak EMs in 2021.
Yet a combination of strong DM growth, underperforming EMs and a belief that inflation was transient kept gold in a fundamental soft spot
Central Banks weren’t buying gold during the recent inflationary spike
Next up they differentiate between Gold and Bitcoin creating what can be viewed as a strong distinction between the two assets as inflation hedges. This is a novel idea and not without merit.
The Real Difference Between Bitcoin and Gold
They then go on to differentiate the use of Bitcoin vs Gold in hedging inflation at different points in the cycle.
Today, the global growth-inflation mix is markedly different. While there is not yet talk of recession, our economists forecast a material deceleration in US growth…
Essentially their take is that Bitcoin is a beneficiary of the printing press, and Gold benefits more from a stagflationary outlook where the economy is shrinking but rates must remain firm. In their view, gold is a risk-off inflation hedge while Bitcoin is a risk-on inflation hedge.
Basically, They are saying that Bitcoin acts like a high-flying equity asset that benefits from Fed monetary stimulus. But Gold will benefit from a slowdown as investors rush to low volatility assets that still offer inflationary protection.
Gold rallies during rate hikes?
One other key point that caught our eye was the contrary trope that Gold actually performs better during rate-hike cycles. Goldman asserts:
Historically, gold tends to increase during rate hiking cycles, particularly when US growth starts to decelerate and EM dollar purchasing power holds firm. Gold is a hedge against bad inflation. [ EDIT- Stagflation?]
Data suggests that Gold does indeed frequently bottom after the first rate hike in a cycle. Cynically speaking, this can be a product of Fed policy of hiking-so they-can-ease-again; at least the last four cycles they hiked.
Analyzing the Analysis
We checked Goldman’s claim on this. In the four rate hike cycles since 1994, Gold did do well after the first hike was announced. In 2015, Gold went on an eight month tear after the rate hike cycle started…
In 2004, something similar happened. Less extreme, but a much longer run up…
In 1999 the numbers were also good, but that was during the Ashanti gold default. It doesn’t count. In 1994 it worked as the graphic above shows. So, why can this be true?
Gold Leads Because the Dollar Leads
For one thing, bigger markets like Bonds and the Dollar do discount fed behavior quicker than stocks do. So, if Gold is a proxy for the USD and the dollar anticipates Fed behavior months in advance, then this makes a lot of sense.
Here is a bullet summary of the report's key points:
In 2021, gold was hurt by a strong US and weak EMs
Get long gold on weaker US growth and resilient EMs
Gold rallies during rate hikes
Gold is a risk-off inflation hedge, bitcoin a risk-on inflation hedge
Recession risk a key barometer for investors’ gold preference
Gold is a hedge against bad inflation
Stagflation Mechanics
One other thing that rings true to GoldFix is this: When we have real systemic non transient inflation, Gold is frequently the last thing to rally. After everybody has bought all the consumed commodities they need like: grains, copper, and oil; only then do they turn to Gold and Silver whole-heartedly. Why? When businesses and people have all the use-able commodities they need but future business prospects are dim and they're still worried about inflation, they buy Gold. Those are the mechanics of stagflation. Isn’t this just like saying, stagflation is frequently why gold goes up? We think so.
Goldman changed price targets for Gold in 2022. For the first quarter they see Gold lower than previously thought, but are calling for more of a late year run up. The think the barbarous relic can touch $2050 in 6 months.
There is one more worth noting, and it is a big one. In October 2018 Federal Reserve Chairman Jerome Powell said the central bank is “a long way” from getting rates to neutral, a fresh sign that he believed more hikes are coming. The last rate hike that year was December 19th.what did Gold do in 2019 and 2020?
Which brings us to today. Gold is up $25.00 off the lows after looking like Armageddon was coming on Friday.
We wonder who was buying?
For a brief explanation of investment logistics when these type events happen, listen to this podcast:
Excerpt Slides: bonus content