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Goldman says return of fear is good for gold

Singapore

GOLDMAN Sachs Group Inc said that "fear" has made a comeback, and gold is benefiting as stocks slide and investors fret more about the possibility that the US economy may tumble back into recession.

Bullion's recent advance "happened on the back of the market sell-off and spike in volatility", analysts including Mikhail Sprogis and Jeffrey Currie, wrote in a report dated Oct 30.

"In our view, it represents a rebound in fear-related demand for gold with ETFs (exchange-traded funds) beginning to build after several months of declines."

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Bullion is heading for the first monthly gain in seven after equities slumped and concerns over a trade war festered, hurting the outlook for growth.

The US has a greater than 50-50 chance of tipping into a recession in the next two years, according to a model tracked by JPMorgan Chase & Co. The spike in market worries on the possibility of a recession have been the primary reason behind a rebound in gold investment demand, according to Goldman.

"While we think that the US cycle still has room to run, it doesn't mean that markets will not worry about it coming to an end," Goldman said, describing US growth as "still strong".

Still, the bank added: "Going forward, we expect market 'fear' of a US recession to strengthen. Recession worries and gold investment may increase further after US growth begins to slow down."

Spot gold traded near US$1,227 an ounce on Tuesday. While that is up 3.1 per cent in October, the metal has lost ground in 2018 as the Federal Reserve has pressed on with interest rate rises. Goldman described bullion's fundamentals as solid, and kept its three, six and 12-month forecasts at US$1,250, US$1,300 and US$1,350, but sees upside risks once US growth begins to slow.

The bank listed other reasons it was positive on bullion, citing prospects for central bank buying, higher core inflation in the US, and rising emerging market demand. It cautioned that there may be some short-term headwinds related to volatility in emerging market currencies and the yuan in particular.

For next year, the bank's economists forecast a slowdown in US growth to 2.6 per cent from 2.9 per cent, and a pick-up in core inflation to 2.5 per cent, it said.

"This could make the US economy look increasingly like it is entering late-cycle inflation overshoot and further support gold investment." BLOOMBERG