Gold Prices Expected to End the Year Higher, According to Goldman Sachs

Gold prices are expected to continue their upward trend and end the year higher than previously anticipated, as central banks in emerging markets continue to accumulate real assets amidst geopolitical risks, according to financial-services firm Goldman Sachs. In a report released on Friday, analysts at the firm raised their year-end target for the precious metal to $2,700 an ounce, up from the previous level of $2,300.

Over the past two months, gold has rallied by over 20% and reached a new record of over $2,400 an ounce on Friday. This surge is driven by concerns of a potential escalation of war in the Middle East, should Iran attack Israel. Analyst Nicholas Snowdon at Goldman Sachs highlighted that the recent upside in gold prices is mainly due to new incremental factors, including increased accumulation by emerging-market central banks and Asian retail buyers.

Snowdon also pointed out that forecasting gold prices necessitates a new approach, as the precious metal continues to rise despite the possibility of the Federal Reserve cutting interest rates fewer times than previously expected. Normally, higher interest rates would drive greater demand for the U.S. dollar in comparison to gold. However, Snowdon suggests viewing gold as a barometer for fear and wealth, wherein the fear component can be cyclical or more structural, related to confidence in the dollar-backed international monetary system.

A key distinction between cyclical and structural fear lies in the correlation of gold with real rates, which are interest rates adjusted for inflation. If those purchasing gold also invest in Treasuries, it signals confidence in the current system. However, when gold and rates rise together, as they have recently, it indicates a clear shift in risk preference towards real assets, according to Snowdon.

Goldman Sachs identifies four major developments that could potentially curb the momentum for gold. These include a reduction in buying by central banks in emerging markets due to easing geopolitical tensions or reaching target levels for hard assets. Additionally, a peaceful resolution to ongoing issues in the Middle East and Ukraine, along with a settlement in associated sanctions risk, would likely act as a constraint to emerging-market central bank buying. China's efforts to support its struggling property sector and a hawkish tilt by the Federal Reserve to raise rates in an attempt to curb inflation would also reduce the demand for gold.

However, Goldman Sachs notes that the near-term potential for a combination of these developments is low, supporting their expectation of continued bullish momentum in the gold price.

Overall, as geopolitical risks persist and central banks in emerging markets continue to diversify their holdings into real assets like gold, the precious metal is poised to maintain its upward trajectory and potentially reach new highs by the end of the year.