Goldman raises gold forecast, says get long as hedge against 'bad inflation'

Published Wed, Jan 26 20229:58 AM ESTUpdated Wed, Jan 26 202212:16 PM EST

Goldman Sachs believes that the stage is set for gold to enjoy a big rebound as investors are poised to pile into the inflation-hedging safe haven this year. The Wall Street firm hiked its 12-month forecast on the bullion to $2,150 a troy ounce from $2,000 previously. Goldman added that it's launching a long gold futures (expiring December 2022) trading recommendation. Spot gold traded near $1,841 on Wednesday, while U.S. gold futures settled up 0.6% at $1,852.50 in the previous session. "This combination of slower growth and higher inflation should generate investment demand for gold, which we consider to be a defensive inflation hedge," Goldman analyst Mikhail Sprogis said in a note. "In addition, we expect continued growth in EM dollar-wealth and a rebound in consumer and central bank demand for gold." The firm said gold makes a good hedge against "bad inflation" if and when price pressures turn out to be more permanent. Last year, gold failed to respond to high inflation as price increases were perceived to be transitory by the market. The precious metal fell by 7% in 2021 to finish the year at $1800, underperforming the Goldman forecast of $2,000. Gold also was hurt by a strong dollar and weak emerging-market assets last year, Goldman said. "A combination of strong DM growth, underperforming EMs and a belief that inflation was transient kept gold in a fundamental soft spot, facing a fall in demand for defensive assets," Sprogis said. The conventional wisdom calls for gold to weaken in a rising rates environment as higher bond yields make nonyielding gold less appealing. However, Goldman believes gold usually rallies during rate hikes. "Contrary to many investors' expectations, Gold has remained very resilient during the recent increase in US real rates. In our view, this is due to gold's status as both an inflation-hedging and a defensive asset," Sprogis said. The Federal Reserve is expected to signal at its meeting this week that it is ready to raise interest rates as soon as March and that it will consider other policy tightening.