Gold prices have surged nearly 18 per cent, so far, in the calendar year 2022 (CY22) to around $2,050 per ounce against the backdrop of the ongoing Russia-Ukraine war and there is more headroom over the next few months, believe analysts at Goldman Sachs who expect the yellow metal to become costlier by another 25 per cent to $2,500 an ounce by the year-end.
Goldman Sachs, earlier, had raised its 12-month gold price forecast to $2,150 per ounce considering that an impending US growth slowdown would lead to increased concerns of a US recession and incentivise 300 tonnes of inflows into gold ETFs.
At the beginning of the Russia-Ukraine tensions, Goldman Sachs had suggested the resultant rally in commodities could deteriorate the developed market (DM) growth-inflation mix, increase concerns of a American recession, and push gold ETF inflows to 600 tonnes and, in turn, lift gold prices to $2,350 an ounce in 12 months.
This scenario, it said, is now becoming the base case.
“The last time that we saw all major demand drivers accelerate simultaneously was in 2010-2011 when gold rallied by almost 70 per cent.
"Given the material upward revision in investment and demand assumptions, we now upgrade our 3 /6 / 12-month gold targets from $1,950/2,050/2,150 an ounce to $2,300/2,500/2,500 per ounce,” wrote Mikhail Sprogis, Sabine Schels, and Jeffrey Currie of Goldman Sachs in a recent note.
Gold ETFs, Goldman Sachs believes, are building aggressively for the first time since 2020.
“This momentum is only set to accelerate as our strategists think the market has not yet priced in a US growth slowdown, which our economists believe is needed to curb inflation,” it said.
That apart, Goldman Sachs believes gold’s usual negative relationship with real rates will break down as they become a poor barometer of fear when the US Fed is hiking rates.
“As we found in the past, gold prices tend to rally during Fed rate hiking cycles,” the note said.
Another fallout of the Russia-Ukraine conflict, Goldman Sachs said, will be that Russia will not only not sell its gold reserves but will likely return to being a large gold buyer after the ruble stabilises.
Given Russia’s experience with forex reserves, it is possible that other countries may prefer to hold a larger share of their reserves in gold over the long run as well, it said.