Anyone who doubted whether gold was poised to stage an encore after 2019’s blockbuster performance is 4% worth of wrong, and we’re only three trading days into the new year.
Carefully-polished, shiny inflation hedges tacked on 1.7% Monday as the safe-haven bid precipitated by the assassination of Iran’s most revered general gave the metal another boost, pushing prices to the highest in more than six years.
Goldman is excited. “History shows that under most outcomes gold will likely rally to well beyond current levels”, the bank says, adding that “additional escalation in US-Iranian tensions could further boost prices”.
Gold is already within striking distance of Goldman’s near-, medium- and longer-term forecast of $1,600.
For now, the bank is sticking with those calls, but “see[s] upside risks if geopolitical tensions worsen”.
Gold is coming off its best year since 2010. 2019 was the year when central banks’ “lower for longer” mantra appeared to morph into “lower forever”, helping support prices. Ironically in that context, demand from central banks has been another bullish factor for gold.
It’s worth noting that early last month, Goldman delivered a lengthy case for why gold was likely set to extend gains. One of the points the bank made was that there’s no guarantee the pro-cyclical rotation which dominated investor sentiment in Q4 would continue, but more importantly, the bank noted that “further upside in long term US rates is likely to come from rising inflation expectations rather than rising real rates, which matters more for gold”.
Relatedly, the bank reminded investors that “a high inflation hurdle for a return of central bank hikes limits the nominal rate upside making it challenging for real rates to increase together with breakeven inflation”.
Any dollar weakness would also be bullish for gold on the margins, and we got that into year-end.
As far as the medium-term goes, Goldman cited “late cycle concerns and heightened political uncertainty” which the bank said will “likely support investment demand for gold as a defensive asset [while] household savings in major developed economies are growing strongly” producing a savings glut that may juice demand.
Further, it’s possible gold supplants DM bonds as the preferable safe-haven during a downturn given the distinct possibility that, by virtue of the low starting point, yields have less room to fall, thus leaving bonds as a less effective hedge.
“This is particularly relevant for Europe where rates are already close to the lower bound [and] it means that during the next recession when fear spikes, gold may decouple from rates and outperform them”, Goldman suggests, adding that “such a gold-rates divergence would not be unprecedented [as] there are multiple examples when rates and gold decoupled in the past”.
In any event, there’s no reason to overthink things on Monday. The bottom line is that Donald Trump sparked a safe-haven bid by “dropping a stick of dynamite into a tinder box” (to quote Joe Biden), and now, investors are seeking shelter.
Gold is nearing the most overbought levels in 20 years, as prices have risen some $120 in the space of a month.
If the events that transpired over the weekend (e.g., Iran abandoning all of its commitments under the nuclear accord and Trump doubling down on war crimes threats) are any indication, there could be further upside from here.
As the president would say, “We’ll see what happens”.