Gold prices will end the year higher than expected as emerging market central banks continue to accumulate real assets amid geopolitical risks, analysts at financial services firm Goldman Sachs said Friday in a report.
They raised their end-of-year target for the precious metal at $2,700 per ounce from the previous level of $2,300 per ounce. Gold over the past two months has risen more than 20% and on Friday broke another record by more than $2,400 an ounce, amid fears that Iran could attack Israel, which could lead to an escalation of war in the Middle East.
“The majority of gold’s rise since mid-2022 has been driven by additional new (physical) factors, including a significant acceleration in emerging market central bank accumulation as well as retail buying in Asia,” said Nicholas Snowdon, an analyst at Goldman Sachs. said in an April 12 report.
Forecasting gold prices requires a new approach, he said, as the precious metal rises despite the possibility that the Federal Reserve will cut interest rates this year less often than expected. Higher rates generally lead to greater demand for the U.S. dollar relative to gold.
“It’s useful to think of gold as a barometer of fear and wealth,” Snowdon said. “The fear component can be cyclical – 2000, 2008, 2020 – or more structural, when confidence in the international monetary system supported by the dollar is called into question. »
A key difference between cyclical and structural fears is the correlation between gold and real rates, he said. A real rate is an interest rate that has been adjusted to eliminate the effects of inflation.
“If those who buy gold also buy Treasuries, their confidence in the system remains,” Snowdown said. “However, if gold and rates rise together, as they have in recent periods, this signals a clear shift in risk preference in favor of real assets.”
What will end the gold momentum?
Four major developments could dampen appetite for gold, according to Goldman. Declining central bank purchases in emerging markets, either due to an easing of geopolitical tensions or because banks have met their sustainable asset targets, are the first two.
“A peaceful resolution of ongoing issues in the Middle East and Ukraine, and a resolution of the associated sanctions risk,” the report said. “This would likely constrain purchases by emerging market central banks.”
China’s efforts to support its real estate sector, which is suffering from massive debt, could lead Chinese consumers to reduce their gold purchases. Finally, a hawkish Fed stance to raise rates as part of its continued efforts to curb inflation would also reduce demand for gold.
“The reality is, however, that the short-term potential for a combination of these developments is low, supporting our expectations of continued upward momentum in the price of gold,” according to Goldman Sachs.