Some eyebrows were certainly raised when the megabank Goldman Sachs expressed serious doubt about the rally that gold prices have experienced so far this year. Goldman declared that the surge for the yellow metal was a mirage, despite the mountain of evidence from multiple fronts—whether you look at spot prices, futures, ETF holdings, or physical buying patterns.
Goldman’s Bold Prediction
At the beginning of March, a note from Goldman Sachs indicated that the bank’s analysts believed the rally for gold prices would soon be running out of steam. It predicted that prices would retreat back to the $1,100/oz range in due time, wiping out the impressive 20% rally that we have seen thus far in 2016.
Although they aren’t the only voice that has been skeptical about gold’s surge into bull market territory this year, Goldman Sachs is by far the most prominent naysayer that the markets have heard from on this subject. There’s no doubt that when a player as big as Goldman issues such a bold declaration, people listen—and oftentimes base their investment strategies on such advice.
Goldman Sachs reiterated this claim of gold’s imminent demise last week. This hasn’t been enough to make a difference in the gold market, however. In spite of the Goldman note, bullion prices have continued to be strong. This has occurred even has equity prices have also been back on the rise.
Factors in Favor of Gold
In addition to bullish bets on the yellow metal remaining at their highest in 13 months, gold is on track for its third consecutive month of gains. The three-month rally also represents gold’s best quarterly performance in 30 years. The group that is staking out long positions in gold includes managed money (traditionally a group that mobilizes against gold as an asset) piling onto the bandwagon.
Negative interest rates, which boost gold’s attractiveness relative to assets that bear interest, have been spreading like wildfire. In general, central bank policy is veering into increasingly uncertain territory, which is one of the main drivers for gold as a safe haven. After raising the federal funds rate—the country’s benchmark interest rate—for the first time in a decade last December, the Federal Reserve has offered less and less clarity on what it will do going forward. This fact alone continues to stoke market anxieties. The Fed’s board of governors meet this week (known as the FOMC) to discuss monetary policy and the economy. Across the world, several other monetary authorities will also be holding policy meetings this week, including the Bank of Japan (BOJ).
As far as exchange-traded products are concerned, gold has been the star of the show. Gold ETFs have seen their stockpiles of the precious metal rise for 10 straight weeks, amounting to a staggering $7.7 billion in total inflows of metal. That also means that ETFs backed by gold have seen their bullion holdings rise to 1,738.3 metric tonnes.
In any event, the prediction made by Goldman Sachs will be put to the test in the coming months, especially after the FOMC meets a few times and decides where U.S. monetary policy is going. Most experts acknowledge that gold is tied closely to the direction of monetary policy and the U.S. dollar.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.