On Monday, banking giant Goldman Sachs announced it is staying long gold. Due to low real interest rates, slower US economic growth, and rising debt, the bank has also raised its gold forecast for 2012.
The report by Goldman states, "We expect gold prices to continue to climb in 2011 given the current low level of US real interest rates. Further, with our US economics team now forecasting slower US economic growth in 2011 and 2012, we expect US real interest rates to remain lower for longer, supporting higher gold prices through 2012." The bank also said that the ongoing debt crisis in the euro zone is "skewing the balance of risks to higher gold prices." Ben Bernanke has already pledged to keep interest rates at all-time lows for at least mid-2013. Furthermore, the Federal Reserve recently slashed its economic growth projections for 2012. Fed officials now expect the US economy to grow by 2.5%-2.9% next year, down from previous projections of 3.3%-3.7% made in June.
What strategy is the bank employing to take advantage of the current economic situation? Goldman says, "With expiration approaching, we are rolling our outstanding long Dec-11 Comex gold trade recommendation, entered on Oct. 11, 2010 with an initial value of $1,364.2/toz and a current gain of $423.9/toz, into a long Dec-12 Comex gold future position with a reference price of $1,800.5/toz." Translation, Goldman was bullish on gold for 2011, and continues to be bullish on gold for 2012.
The report also gives a short-term price forecast. For gold, the bank increased its three-month forecast by 7.0% to $1,760 a troy ounce from $1,645/oz, its six-month forecast by 5.8% to $1,830/oz from $1,730/oz, and its 12-month forecast by 3.8% to $1,930/oz from $1,860/oz. Credit Suisse has also said that gold may climb over $1,800 in the coming days due to negative real interest rates as the key driver. However, with the Fed's low interest rate pledge, negative real interest rates are likely to remain for a number of years. Given this, many expect gold prices to climb above $2,000 per ounce. Dr. Walter de Wet, the head of commodity research at Standard Bank in London, expects gold to hit $2,200 at the end of the first quarter next year. He believes more quantitative easing is on the way for Europe and the US, and does not see the Fed stopping its expanding balance sheet for another three or four years. Standard Bank predicts that $500 billion of QE3 will add $200 to the gold price early next year.
In the middle of Goldman's report is a very telling sentence that aligns the interests of Goldman Sachs and Standard Bank. Goldman says, "Given our US economists' cautious economic outlook and the significant downside risks associated with the European turmoil, additional Fed easing might well be needed." While the fundamental reasons for precious metals remain strong, Goldman going long on gold may also be a bet on QE3.
If you would like to receive more professional analysis on equity miners and other precious metal investments, we invite you to try our premium service free for 14 days.
Eric McWhinnie is the chief commodities analyst at Wall St. Cheat Sheet. He has been an analyst at Wall St. Cheat Sheet since early 2010. He has worked at State Street and Waddell & Reed in financial advisory services and is also the editor of Wall St. Cheat Sheet's Gold & Silver Investment Newsletter and Commodities Investment Newsletters.