Forget Goldman Sachs; Here’s Why Gold Prices Could Soar
Goldman Sachs is out with a dour gold price outlook. Goldman economists forecast that gold prices will remain in the $1,100 per ounce range for the next three months, under $1,050 per ounce in six months and fall to $1,000 per ounce over the next year. (Source: “Don’t be fooled by gold’s recent comeback: Goldman,” CNBC, October 21, 2015.)
They reason is that the Fed will raise interest rates by 0.25% in December and by one percent in the first half of 2016, obviously making it less favorable to hold gold bullion against interest bearing investments. Apparently, Goldman economists failed to read the minutes from the Federal Open Market Committee’s (FOMC) September meeting.
Goldman says its economists are about 60% confident that an interest rate hike will happen in December, but I’m 100% confident that it wouldn’t because the Fed has already hinted at the contrary. Here are some snippets from the minutes of the last Federal Reserve meeting.
“The Committee reiterated its expectation that, even after employment and inflation are near mandate consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”
The economic headwinds trickling down from China and the eurozone, along with the political crises in the Middle East, are not clearing any time soon. In addition, big U.S. corporations are coming out with earnings/revenue misses in their latest quarters and many are cutting their guidance for the next year. The one indicator that confirms their troubles is across the board layoffs and impending job cuts, including Biogen, Credit Suisse, Caterpillar, Wal-Mart and Twitter, to name a few. The Fed doesn’t see job numbers to be any more optimistic than they were in September.
“Most (FOMC) participants projected that the unemployment rate would be at or only slightly above their estimates of its longer-run normal level at the end of the year…”
Seemingly, Goldman researchers are overlooking the general trend here that of all the commodities this year that showed a clear decline, gold has generally shown the best performance by staying relatively flat through the year and picking up a rally in the past days. Gold is so far up eight percent through the second half of this year. The decline in gold prices has also been due, in part, to a strong dollar. But as the dollar loses its value, gold is starting to find a strong ground to rise.
Chart courtesy of www.StockCharts.com
The gold bullion has lost more value from the fears of the interest rate hike than the actual interest rate hike, which for almost a decade now has remained pending. The current interest rates are so low that a fraction of increase shouldn’t do much harm to the yellow metal. The strength to gold bullion will additionally come from the three big BRIC economies; China, Russia, and India. All of which are quickly racking up their gold reserves at the current multi-year lows.
Final take; gold prices are not going down to $1,000 per ounce in the foreseeable future.