Goldman Sachs analysts said on Friday that as emerging market central banks continue to buy gold amid geopolitical risks, the price of gold will be higher than previously anticipated by the end of this year.
The Zhitong Finance App learned that Goldman Sachs analysts said on Friday that as emerging market central banks continue to buy gold amid geopolitical risks, the price of gold will be higher than previously anticipated by the end of this year.
They raised their year-end target price for gold to $2,700 per ounce from the previous year's $2,300 per ounce. Over the past two months, the price of gold has risen by more than 20%. Last Friday, it hit a new high of more than 2,400 US dollars per ounce, as the market feared that Iran's attack on Israel could lead to an escalation of the war in the Middle East.
Goldman Sachs analyst Nicholas Snowdon said, “Since mid-2022, most of the rise in gold has been driven by new incremental (physical) factors, particularly the accumulation of central banks in emerging markets and a significant acceleration in retail purchases in Asia.”
Snowdon said that forecasting the price of gold requires a new method because although the number of interest rate cuts by the Federal Reserve this year may be lower than previously anticipated, the price of gold is still rising. Higher interest rates usually drive up demand for the dollar relative to gold.
“It's useful to think of gold as a barometer of fear and wealth,” Snowdon said. “The fear component may be cyclical — 2000, 2008, 2020 — or structural, at which time people's confidence in the international monetary system supported by the US dollar will be challenged.”
He said that the key difference between cyclical fear and structural fear is the correlation between gold and real interest rates. Real interest rates are interest rates adjusted to eliminate the effects of inflation.
“If those who buy gold are also buying public debt, then their confidence in the financial system still exists,” Snowdown said. “However, if the price of gold and interest rates rise at the same time, as in recent periods, then this indicates a clear shift in risk appetite to real assets.”
What will end gold's rise?
Goldman Sachs believes the four major trends may curb demand for gold. First, emerging market central banks have reduced purchases because geopolitical tensions have eased, or because central banks have reached their hard asset targets.
“Resolve ongoing issues in the Middle East and Ukraine peacefully and address associated sanctions risks,” the report said. “This could limit the buying behavior of central banks in emerging markets.”
Finally, the Fed's hardline tendency to raise interest rates to curb inflation will also reduce demand for gold.
Goldman Sachs said, “However, the reality is that the short-term potential for a combination of these factors is very low, which supports our expectations for a continued bullish trend in gold prices.”
Editor/Somer