Following the Fed’s third interest rate cut in two quarters, Goldman Sachs is increasingly bullish on gold. Here’s why they say prices can hit $1,600 by April.
The Federal Reserve met most market expectations this Wednesday by cutting interest rates for the third time this year after rigidly sticking to a tightening cycle that started in 2015. In a report published ahead of the Fed’s decision, Goldman Sachs predicted that the Fed’s latest cut would be accompanied by a more hawkish tone than those of previous months in order to ease concerns over the domestic economic trajectory.
The cuts started mid-summer, following an abrupt policy shift meant to offset the effects of the U.S.-China trade war. With a third cut in the books within two quarters, Goldman’s analysts believe that the Fed is growing wary of investors pulling back over a palpable domestic and global growth slowdown.
The three cuts have already given gold plenty of support, as the metal has enjoyed its best run since 2013 and remains firmly above the $1,500 resistance level. Yet Goldman’s analysts believe that there are plenty of other factors supporting the gold market that will push gold to $1,600 over the next six months.
These include conspicuous de-dollarization by central banks around the world, which bought a record 651 tons of bullion in 2018. Forecasters expect the official sector to exceed this figure handily this year, with most predicting a combined 750 to 800 tons of bullion bought by the end of 2019.
Goldman also lists the many risks that have kept investors on their toes this year, including the aforementioned trade conflict, tensions with the Middle East, the likelihood of a no-deal Brexit that could disrupt the eurozone and political turmoil in the U.S. To top things off, the global growth contraction has resulted in diminished factory production as well as business investment.
Goldman’s team also took note of an increased affinity towards defensive portfolio rotations, noting that the economic climate has created a precautionary savings glut with an increased demand for cash that has boosted the price of gold and bonds, despite the latter’s dismal showings. This risk-averse investment and uncertainty regarding policies is unlikely to be resolved anytime soon, said Goldman.
Standard Chartered’s precious metals analyst Suki Cooper voiced similar thoughts in a report released last week, stating that three rate cuts would be highly supportive of gold, especially given the number of risks on the horizon. Cooper also noted that the Fed might move on to cut rates for a fourth time in December. Adding on to Goldman’s prediction that gold will hit $1,600 by Q2 2020, Cooper said that the metal is so well positioned that any pullback in prices would be restrained to the $1,450 level.