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Goldman Sachs: 'Strategic Case Is Still Strong' For Holding Gold

Kitco News

(Kitco News) - Goldman Sachs says the “strategic case is still strong” for investing in gold and reiterated its call for the precious metal to rise to $1,600 an ounce next year, even though analysts conceded there could be more of a pullback in the short term.

Gold has risen by 19% over the last 12 months due to slower global economic growth and elevated geopolitical tensions prompting “fear-driven” demand, Goldman said. However, since September, the metal has eased from its highs for the year due to a rotation into pro-risk assets and an increase in long-term real interest rates, the bank continued.

Further, the metal could ease some more due to elevated speculative positions, Goldman said. Traders exiting bullish trades are potential sellers.

“Overall, while we acknowledge the risks related to still-high gold positions, we believe the strategic case is still strong, particularly for investors with long-term horizons,” Goldman said in a report prepared just ahead of the weekend. “This is based on a deteriorated attractiveness of long term DM [developed-market] bonds as portfolio diversifiers and real return generation instruments, exposure to growing EM [emerging-market] wealth, limited mine supply growth, elevated political risks and a potential increase in debasement concerns sparked by rising airtime of Modern Monetary Theory.”

Analysts explained that Modern Monetary Theory calls for larger money-financed fiscal deficits.

“While our economists do not expect governments to adopt direct monetary financing, more widespread discussions of MMT could lead to greater demand for gold on debasement concerns,” Goldman said.

The bank said it maintains three-, six- and 12-month forecasts of $1,600 an ounce. As of 8:30 a.m. EST, spot metal was trading at $1,462.70 an ounce, up $3 for the day.

“In our view, the case to diversify long-term bond holdings with gold is as strong as ever,” Goldman said. “Put simply, the lower bound in rates may limit the ability of bonds to appreciate in material risk-off environments. This creates room for alternative diversifiers like gold, which tends to diverge from real rates when the latter stop acting as a good risk barometer.”

In addition to benefiting from its hedging properties, gold can appreciate due to a positive “wealth effect,” particularly as emerging-market economies expand, even while bonds earn a yield, Goldman said. The bank calculated “wealth effect” gains of gold at 4.6% annually in the coming years, compared to a 2.3% expected yield for 10-year Treasury Inflation-Protected Treasuries or a 1.79% yield on 10-year nominal bonds.

Analysts also look for central-bank demand to remain strong.

“High political uncertainty due to continued trade tensions and the approaching U.S. elections should also be supportive gold in 2020,” Goldman said. “This uncertainty may be one of the reasons why we see evidence of a non-ETF [exchange-traded-fund] vaulted gold build, as high net-worth individuals may want to store gold outside the financial system.”

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