The price of gold, one of the most eagerly watched indicators of market confidence, is currently “too low” relative to real interest rates, according to commodities analysts at Goldman Sachs .
The analysts forecast that gold will rise to $1,785 per ounce over the next 3 months, $1,840 over the next 6, and $1,940 over the next year.
“At current price levels gold remains a compelling trade but not a long-term investment,” they wrote in a note.
They argue that U.S. real interest rates are the most important driver of the price of gold in dollars – but that this relationship broke down late last year and has not yet returned to the level current negative or low yields on 10-year Treasurys imply. The low yields have come following the Federal Reserve’s Operation Twist – which involved the central bank buying up longer-term Treasurys and selling shorter-term Treasurys and helped restore the markets’ confidence in the U.S.
“We believe that despite last fall’s decline in 10-year TIPS yields, the gold market may have been expecting that real rates would soon be rising along with better economic growth, leading to a sharp decline in net speculative length in gold futures,” the analysts said.
“Our U.S. economists expect subdued growth and further easing by the Fed in 2012, which should push the market’s expectations of real rates back down near 0 basis points and gold prices back to our 6 month forecast.”
More bearish views state that the gold price has already peaked at last year’s record high of $1,920.70, as markets get more confident about the future of Western economies.
Malcom Norris, CEO of Australia-based miner and explorer Solomon Gold, told CNBC Wednesday the precious metal could even reach $2,000 per ounce.
The Goldman analysts admit that stronger-than-expected U.S. economic data is a “growing risk” to their forecasts for the gold price. Better-than-expected data on the slow U.S. recovery, as well as mass liquidity injections in the European banking system, have helped to drive the price of gold down this year.
There is also some speculation that central banks around the world may start buying gold again, after the UK’s Chancellor of the Exchequer George Osborne hinted that the Bank of England may stockpile the precious metal in last week’s Budget – although he later said he meant reserves in general rather than specifically gold.
“By holding more gold central banks are insuring themselves against their own profligacy. They print money. The price of gold goes up. And if they hold a lot of the stuff in their vaults, they are the big winners from the rise in price,” Matthew Lynn, founder of Strategy Economics, wrote in a research note.
“If you can pull it off – and there isn’t anything to stop you – that sounds like an easy way to make a living.”