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Goldman Sachs sees a scenario where gold prices rally sharply to $2,250 by 2025

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(Kitco News) - The Federal Reserve's commitment to slow the economy to cool down rising inflation continues to push the U.S. economy closer to a recession.

Tuesday, in an interview with CNBC, David Soloman, CEO of Goldman Sachs, said that this is a time to be cautious as there is a good chance of a recession. The comment comes as the investment bank sees potential upside for gold in a recessionary environment.

In a report published last week, commodity analysts at Goldman Sachs said that despite gold's volatile year, its upside potential is greater than the downside risks, even as uncertainty dominates the marketplace.

Gold prices have struggled through most of 2022 as the Federal Reserve's aggressive monetary policy has pushed the U.S. dollar to 20-year highs. In the report, analysts at Goldman presented four scenarios and how they will impact gold prices.

The bank sees a 30% chance of the U.S. central bank engineering a soft landing as the country avoids a recession; this would push gold prices to $1,530 an ounce as 10-year real rates rise slightly higher to 1.7%.

At the same time, Goldman also sees a 30% chance of a recession with substantial rate cuts to zero by 2025. This scenario would see gold prices spike to $2,250 an ounce.

The analysts said they see real rates dropping by 1%, but they would still remain in positive territory.

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The worst-case scenario for gold would be if the inflation threat grows, forcing the Federal Reserve to continue to raise interest rates. This environment would push gold prices to $1,500 an ounce as real rates rise by another 1.5%. Goldman sees a 20% chance of this happening.

In the fourth scenario, Goldman sees a 20% chance of a recession with limited rates cuts, which would push gold prices back to $2,000 an ounce.

In this scenario, the Fed Funds rate is expected to fall back to 2.5% by 2025 as the central bank balances growth concerns with persistent inflation.

"Growth concerns together with the fall in real rates should trigger a material rotation towards defensive assets," the analysts wrote in the report.

"Our main finding is that elevated recession risks create a positive asymmetry in gold's return profile. Namely, gold's downside in the case of a 'soft landing' or further Fed hawkishness is significantly less than gold's upside in the case of a growth shock that pushes the U.S. economy into a recession," the analysts added.

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