commodities

Goldman No Believer in Gold Rally

In spite of recent trends that seem to favor gold and other precious metals

it would seem that Goldman Sachs Group Inc. has failed to live up to its name – literally. They predict serious losses for those who invest in gold. The main reason behind their skepticism seems to lie in the upcoming increases in interest rates. It should be said that, even though Goldman Sachs is far from alone in making such predictions, they should still be taken with a grain of salt, and one should always be open for the interpretation of recent and unforeseen events.

The underlying assumption seems to be that the U.S. Federal Reserve will drive the interest rates up at least three times this year alone, which would invalidate investments in gold and other precious metals. While it may be true that gold and the U.S. dollar seem to follow opposite trends, and that when one of them jumps in value, the other one starts to plummet, this may not necessarily come true this time around.

The current forecasts for 2016 are favorable for the Fed rates, which are expected to rise to 1.3 percent in three separate stages, while the gold bullion is supposed to trade for $1,000 per ounce by the end of the year. Nevertheless, the sales in gold have been on the rise this year, triggered by chaotic equity markets which forced investors to find a good anchor while their boat is still buoyant. However, if Goldman’s predictions are true, the U.S. economy will surpass the current predictions in terms of expected growth, and given the fact that gold does not pay interests no matter the rise of inflation rate, and gold may indeed not be the ideal investment at this moment in time. It may be the safest, but not the best.

In any case, if the U.S. interest rates increase, the price of gold will plummet by the end of the year and people will lose money. However, current fold futures seem unaffected by these predictions, as they keep rising in price as we speak. According to Goldman, the realistic gold prices should reach the $1,100 mark by the end of May. It should drop by $50 three months after that, and by the end of the year, the price should be around $1,000, so at least their numbers add up. An upside risk would be the U.S. borrowing costs and the Fed’s reluctance to increase them. On the other hand, if Russia and / or China suddenly gave up buying gold, the downside risk would be a huge detriment to any investment portfolio that relies on gold.

In the meantime, the expected U.S. interest rates have caused some disappointment in certain circles. Indeed, some of the investors have taken the reluctance in raising the aforementioned interest rates as a bad sign, and the effect was certainly felt across the global markets. For instance, the global equity markets certainly have not benefited from this turn of events, and this situation is not expected to change in a significant way in the foreseeable future. Another thing that added to the despair of investors worldwide as well as to the detriment of their investment plans was the continued plummeting of oil prices and the predicted stagnation of Chinese economy.

If China and India scale down their oil consumption, while the production remains the same or even increases, as Iran is finally able to sell their oil on the open market, there is nowhere the oil prices can go but down. In addition, with China changing the direction of its economy while trying to cope with the recent financial crisis that still grips their markets seriously for the first time in recent history (or at least in this decade), Goldman foresees no way for the oil prices to rise, and most analysts would agree.

As for gold, Goldman’s predictions concerning the price of bullion of $1,000 seems to be supported by strong economic data and facts, although it is still far too early to make such predictions with any real certainty. Financial markets can be quite unstable and there is still far too many things that could go either way in the following months, so monitoring the situation as closely as possible and remaining vigilant for sudden changes may be the best advice anyone could offer, for the time being. As for the analysts, the bearish forecasts for the next twelve months is something they seem to agree on.

 

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1 Comment

  1. January 13, 2017 at 11:07 pm — Reply

    Your post is a timely coutoibntirn to the debate

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