After the overnight Fed decision, spot gold fell slightly as Powell sent a hawkish signal. However, Goldman Sachs remains bullish on the outlook for gold prices this year and raised its target price.
Goldman Sachs reported on Thursday that it would raise its 12-month gold price forecast to $2150 an ounce from the previous $2000 an ounce and recommended buying gold futures in December 2022.
At the current spot gold price of $1816 an ounce, that means Goldman Sachs thinks gold has more than 18% room to rise.
Gold prices were mediocre in 2021, falling nearly 4 per cent for the whole year. Goldman Sachs said gold's fall last year was justified in an environment of strong economic activity last year and expectations that rising inflation was only temporary.
Crucially, rapid economic growth and seemingly stable prices have led to a surge in all risky assets, especially cryptocurrencies. As a result, gold faces not only a decline in investment demand seeking to hedge against depreciation, but also direct competition from Bitcoin as a store of value, "analysts said in the report." differences in global growth expectations have also helped support the dollar. "
Looking ahead to this year, however, Goldman Sachs said it expected most of last year's trends to reverse: "Today, the global growth-inflation mix is significantly different. Although there is no talk of a recession, our analysts expect a sharp slowdown in US economic growth and a new cycle of interest rate hikes that is leading to a safe haven for long-term asset classes. "
"for investors looking to hedge their portfolios against slowing growth and falling valuations, we believe gold bulls will be more effective in the current macro environment," said analysts at Goldman Sachs. "
The Fed's overnight interest rate decision and Powell's speech sent a strong hawkish signal that the Fed's rate hike in March seems certain, and the extent and pace of future rate increases may be stronger than previously expected.
In theory, higher interest rates would boost the dollar, thereby curbing the rise in gold prices. But Goldman Sachs said: "contrary to what many investors expected, gold remained very resilient during the recent rise in US real interest rates. In our view, this is because gold is both an inflation hedge and a defensive asset. "
Slowing economic growth and the threat of inflation are the biggest risks
Analysts at Goldman Sachs point out that the rising risk in the market is that persistently high inflation will force the Fed to tighten monetary policy significantly, which in turn will be a further drag on economic growth. Goldman Sachs has cut its forecast for US economic growth as the US government is unlikely to press ahead with its fiscal stimulus package.
"as US economic growth continues to slow in 2022, market perceptions of the possibility of a recession are likely to increase further," analysts said. "although interest rates are rising, this makes investors more interested in gold."
Another factor Goldman is concerned about is the growing threat of inflation.
Last year, inflation concerns were relatively brought under control because the Fed thought the rise in consumer prices was temporary. However, Goldman Sachs said there was already a risk that inflation expectations were getting out of control, meaning that inflation could be more sustained than expected.
"We estimate that if inflation rises structurally to 4 per cent, based on historical gold inflation, the price of gold could reach $2500 an ounce. We also expect gold prices to be close to that level if the US gold ETF returns to its 2011 high. Therefore, we believe that gold has considerable upward potential in the face of a sharp rise in inflation. "
