Goldman Sachs: Gold Slump Below $1,250 Would Be ‘Strategic Buying Opportunity’

By Kitco News

Friday October 07, 2016 08:02

(Kitco News) - Goldman Sachs analysts say they would view a significant fall in gold below $1,250 an ounce to be a “strategic buying opportunity” due to risks to the global economy and the ability of central banks to respond to any “shocks.”

Goldman Sachs says gold's price drop a strategic buying oppportunityGold has been sliding lately, which Goldman said was in line with its previous bearish base-case price forecast predicated on expectations for a U.S. interest-rate hike and rising real rates by the end of 2016. Now, Goldman analysts describe themselves as neutral on gold into year-end.

Spot gold has fallen from near $1,344 as of Sept. 22 to around $1,250 on Thursday. The metal was at $1,256.50 an ounce as of 7:42 a.m. EDT Friday as traders awaited the monthly U.S. employment report.

“With prices having corrected sharply, we are broadly neutral on the outlook for gold through year-end, with our forecast of the probability of U.S. rate hikes through year-end roughly in line with market expectations (GS 65% vs. market pricing 62%),” Goldman said in a research report released late Thursday.

Analysts said the risks to their year-end forecast of $1,280 an ounce may now be skewed to the downside. A key data point for the market to watch will be the change in Comex speculative positioning, they add. The Commodity Futures Trading Commission releases this data late each Friday afternoon.

Goldman pointed out that even as gold has fallen over the last week, holdings by exchange-traded funds have actually risen. ETFs trade like a stock but track the price of the commodity, with metal put into storage to back the shares.

“Though the GS rates team do continue to see U.S. real rates rising into year-end, which would likely  place downward pressure on gold, the drivers of strong physical ETF and bar demand for gold during 2016 are likely to remain intact, including continued strong physical demand for gold as a strategic hedge, limiting any downside,” Goldman said. “Indeed, we would view a gold sell-off substantially below $1,250/oz as a strategic buying opportunity, given substantial downside risks to global growth remain, and given that the market is likely to remain concerned about the ability of monetary policy to respond to any potential shocks to growth.”

Additionally, Goldman said, Chinese investment demand for gold may pick up after the recent sell-off.

“The potential drivers of increased Chinese physical buying include purchasing gold as a way to hedge for potential currency depreciation in the face of capital controls, and purchasing gold as a way of diversifying away from the property market, which has this year to date had a remarkable rally (with the government moving to rein in speculation and price growth),” Goldman said.