(Kitco News) – Despite gold’s recent lackluster performance, Goldman Sachs continues to see prices rising over the next year as demand in China and other emerging-market nations recovers.
In a report, Thursday Goldman reiterated its forecast for the precious metal to rise to $1,450 by 2019. The comments come as gold hovers around last week’s 12-month low; August gold futures last traded at $1,226.30 an ounce.
The gold forecast was included in a report on the broad commodities sector, with Goldman favoring an “overweight” rating in commodities and looking for a 10% return over the next 12 months
Recent weakness in gold occurred as the market priced in Chinese risk, not the risk from U.S. policies, Goldman said. On the one hand, the sell-off seems “counter-intuitive” since the metal “historically acted as a hedge for policy uncertainty and downside global growth risks – the exact fears which are now on the rise,” Goldman said.
However, analysts pointed out that gold also fell a couple of decades ago during the Asian financial crisis, losing some $250 an ounce.
Based on real U.S. interest rates, “fear” in developed markets appears to be declining despite rising U.S. policy risks, Goldman said. “We believe that is because the policy is now mostly aimed at foreign markets,” the bank continued.
Meanwhile, wealth in emerging markets has diminished like it did in 1998-99, as measured by the U.S. dollar, Goldman said. A muscular dollar normally indicates that wealth generation outside of the U.S. is weak, particularly in China, where domestic assets and the country’s currency have fallen, Goldman continued.
“The reason gold doesn’t go higher in USD is that the Chinese retail consumer still dominates the Chinese investor, where demand likely remains strong,” Goldman said. “Accordingly, a return to a macro backdrop of renewed EM growth and a gradual reversal of EM FX [foreign exchange] keeps us bullish gold through the EM wealth channel.
“Our China team is confident that market concerns about a sharp slowdown in growth momentum should ease, and see USD/CNY returning to 6.40 over the next 12 months, consistent with our 12-month gold target of [$1450/toz].”By Allen Sykora of Kitco News; firstname.lastname@example.org