FMX | Connect – www.fmxconnect.com - (Reported 8/12/2010)
Goldman Sachs Predicts Gold to Move Higher
“The recent sell-off has left speculative long positions in gold oversold relative to US real interest rates, which we believe has set the stage for a rally to our 6-month gold price target of $1,300/toz.”
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Gold prices have sold off on lower speculative positioning …
After rallying to a record high in June, gold prices have declined on a selloff in speculative futures positions and gold-ETF holdings. Although the sell-off in speculative positions might not be surprising given the rise to a record-high price and decreased concerns over European sovereign debt, it stands in sharp contrast to the movements in US real interest rates, which have fallen to near-decade lows.
… however significantly lower US real rates point to higher prices
Under our gold framework, COMEX gold market positioning tends to reflect US real interest rates, with low US rates driving a high level of net speculative length in gold futures. Consequently, the recent decline in gold net speculative length, even as 10-year US TIPS yields fall below 1.00%, suggests that the gold market is now oversold, and we expect increasing speculative long positions to carry gold prices back toward our 6-month COMEX gold price forecast of $1,300/toz.
Renewed quantitative easing measures by the US Fed would be an effective catalyst to drive gold prices higher
We expect the current low real interest rate environment to continue as our US economics team recently lowered their US growth outlook for 2011, with the implication that the US Federal Reserve will likely keep short-term US interest rates low through 2011. This should provide further upside support to gold prices and raise the upside risk to our current gold price forecasts. In addition, our US economics team also expects that the US Federal Reserve will return to quantitative easing measures in late 2010 or early 2011. We believe that a return to quantitative easing could act as a strong catalyst to carry gold prices to higher levels.
Hedging recommendations
Consumers: We expect gold prices to continue to rise from current levels as real interest rates are expected to remain low on a continuation of accommodative US monetary policy. Longer term, however, we continue to see considerable downside risk, should the US Federal Reserve tighten monetary policy earlier than expected. Consequently, we would recommend near-dated consumer hedges in gold, but more so in platinum where recovering global automobile demand will likely continue to put upward pressure on autocatalyst demand and therefore on platinum and palladium prices.
Producers: While we expect gold prices to increase in 2010 and 2011, the rising risk of declining gold prices once the US Federal Reserve begins tightening monetary policy suggests this is a good time for gold producers to begin scaled up hedging of forward production, particularly for calendar 2012 and beyond.
Trading recommendations
Long Platinum: Buy October 2010 NYMEX Platinum (Current value at $1,537.0/toz; first suggested at $1,595.5/toz; $367.6/toz gain including rolls).
We continue to expect that low real rates and the economic recovery will lend further support to platinum prices. First initiated in July 2009 (see our July 15, 2009, Commodity Watch), this trade has since been rolled with a combined gain of $367.6/toz.
Full Document linked at top of page.
H/T Zero Hedge
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