Tuesday, October 12, 2010

Goldman Raises Gold Target to $1,650 in 12 Months

From Kitco News:

"(Kitco News) - Goldman Sachs has raised its 12-month forecast for gold to $1,650 an ounce, citing expectations for further quantitative easing in the U.S. and prospects for long-term interest rates to continue falling.

"“With U.S. real interest rates pushing lower off the slowdown in the pace of the U.S. economic recovery and the growing prospect of another round of quantitative easing, we expect gold prices to continue to climb,” said the Goldman report, authored by David Greely and Damien Courvalin. “Despite the rebound in net speculative length, it remains well below levels consistent with the current low U.S. real interest rate environment.”

"Goldman said the decline in U.S. real interest rates is likely to persist, and rates could push even lower in the near term should the Federal Reserve undertake quantitative easing measures. Thus, Goldman said it is raising its gold price forecasts to $1,400, $1,525 and $1,650 on a three-, six- and 12-month horizon. Goldman said its updated forecasts point to an average of $1,575 an ounce in 2011, which is $175 higher than it previously expected.

"“The return to quantitative easing will likely be a strong catalyst to drive gold prices higher, and we expect the gold price rally to continue until U.S. monetary policy begins to tighten,” Goldman said.

"The bank’s economics team expects the Fed to return to quantitative easing with purchases of U.S. Treasury securities of $1 trillion, which in turn should keep U.S. bond yields depressed. Furthermore, the bank said it expects the announcement at the Federal Open Market Committee’s Nov. 2-3 meeting.

"Goldman said the rally since August came as the yield on 10-year U.S. Treasury Inflation-Protected Securities plummeted, with the yield now closer to the 0.50% than the 1.0% imbedded in prior forecasts. It also cites stronger demand for the metal for gold exchange-traded funds and from central banks." [The article continues.]

According to Goldman, 10-year TIPS yield is inversely correlated to the increase in speculative long positions in gold futures. In other words, the lower the 10-year TIPS yield, the higher the speculative longs. (For more about Goldman's reasoning, see their August paper here. Their August target of $1,300 was to be for the next 6 months...)


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