Goldman Sachs Ignores Latest Rally, Sticks To Call For $1,000 Gold Prices In 12 Months

By Paul Ploumis (ScrapMonster Author)

February 17, 2016 02:49:10 AM

(Kitco News) - Despite gold prices hitting a one-year high last week, analysts at Goldman Sachs have reiterated their bearish call on gold, saying the fear that has battered broader financial markets is overdone.

In a report released late Monday with a headline of “Nothing to fear but fear itself” – the famous line once used by President Franklin D. Roosevelt – Goldman pointed out that gold got a big boost over the last week from worries about low oil prices, China, negative interest rates and potential for systematic risks to banks.

“However, we believe that these fears ignore the facts that systemic risks from oil, China and negative rates are very unlikely,” said the report. “Banks have ample liquidity to maintain funding against higher capitalization, the negative macro impacts from low oil prices have likely already played out and are not systemic, while the spillovers from China are limited and the U.S. is far from recession. Financial markets have overreacted to the point that current inflation breakevens would require oil prices to keep declining for the next seven years.”

Goldman said it maintains an expectation for rising U.S. interest rates and thus lower gold prices, with a three-month target of $1,100 an ounce and a 12-month target of $1,000.

Goldman said its economists put the probability of a U.S. recession at only 15% to 20%. The labor market has been strong, Goldman said, pointing out that the pace of employment growth on a three-month average is 231,000, when it only takes 85,000 new jobs monthly to maintain a stable unemployment rate.

“As a result, employment growth north of 85K would be sufficient to create a gradual pickup in

wage and price inflation, which suggests that only a large slowdown from the current pace would dissuade the Fed from the idea that interest rates should rise from here,” Goldman said.

Meanwhile, Goldman Sachs said negative impacts from declining oil prices are “likely behind us at this point” and that prices “don’t have much further to materially fall.” Weak oil prices have frequently been seen as a sign of a soft economy and thus weighed on stocks, in turn supporting gold.

Courtesy: Kitco News