Goldman Sachs targets gold price at $2,500/oz in 2022

It is said that Goldman Sachs rarely gives subdued updates. They were the first to call crude at $150/bbl in 2008 and now they have called crude at closer to $200/bbl in a worst case scenario. Goldman Sachs, in its latest update, has upgraded the price target for gold to $2,500/oz (per troy ounce) by the end of December 2022. This is a 25% upside from current levels, after a good 18% return that gold has already seen since the start of 2022.

The rise in gold prices has been 18% till date in 2022 to $2,050/oz. Gold has traditionally been a safe haven asset that sees a lot of buying in uncertain market conditions. In the backdrop of the ongoing Russia-Ukraine conflict, Goldman sees enough headroom for gold to spike by another 25% from current levels. Goldman expects demand to be driven by a combination of ETF buying, central bank buying and retail demand.

At the start of the Russia Ukraine conflict, Goldman Sachs had projected that the uncertainty could push gold ETF inflows to 600 tons. In the last few months, nearly 300 tonnes of gold inflows into ETFs have already happened.

The last time, according to Goldman Sachs, the world saw this kind of combination of factors was in 2010-11 when gold had rallied by 70% and at that point of time, gold had scaled up to $2,200/oz in spot market.

Prior to the start of the Russia Ukraine war, Goldman had pegged 6-month target for gold at $2,050/oz and the 12-month target for gold at $2,150/oz. In the light of the uncertainty created by the war, Goldman Sachs has now upgraded the 6-month target and the 12-month of gold to $2,500/oz.

That means, Goldman Sachs expects gold to face a lot of resistance around the $2,500 levels during the current calendar year.

One of the most important points made by Goldman Sachs in this report is that the traditional negative relationship between interest rates and gold could be disrupted. In the past, gold always rallied when interest rates were low as the opportunity cost of holding gold was low.

However, Goldman Sachs expects that in the year 2022, we could see an anomalous situation of gold prices rising in tandem with the rise in global interest rates.

Goldman’s contention is that due to the aftermath of the war and the sanctions, Russia would use the dividends of high oil prices to buy gold. Many other countries would also prefer to hold gold over dollars or they may, at least, choose to underplay their exposure to the US dollar in favour of gold.

Goldman Sachs expects that in the second half of 2022, the gold demand by central banks could reach historically highs of 750 tonnes.

If ETF demand and central bank demand for gold are two sides of the story, the third dimension is the retail demand for gold. Goldman Sachs expects bulk of the demand for retail gold to come from two of the largest gold markets in the world viz. China and India.

While China could benefit from growth levers, Goldman believes that India should also earn the dividends of a rapid post-COVID recovery, translating into robust gold demand.

According to the report put out by Goldman Sachs, gold consumer demand in Dec-21 quarter touched its highest level since 2013.

In China, gold is in a sweet spot. With property prices falling and equities impacted by regulatory tightening, gold remains the obvious choice. In short, India and China could propel the third dimension for gold.