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Sorry, we struggle to remember. Did Goldman Sachs have a longstanding QE2 view?
Oh yeah, right. Silly us. How could we have forgotten any of the following*:
(*And that’s just what FT Alphaville covered.)
All of which makes this little gold call from the investment bank this week all the more understandable:
With the prospects for another round of quantitative easing in the United States increasingly strong, US real interest rates continue to fall. With 10-year TIPS yields now below 50 bps, we expect gold prices to continue to climb, and we are now raising our 12-month gold price forecast to $1,650/toz. We also recommend opening a long Dec-11 COMEX gold position
Gold to hit $1,650 per ounce within the next 12 months. Blimey.
And while Goldman might call that a gold view — it might as well be called a clear-as-crystal US dollar-debasement view too (also known as falling real interest rate syndrome). At least on a temporary basis.
Here’s more on the rationale from Goldman (their emphasis):
With US real interest rates pushing lower off the slowdown in the pace of the US economic recovery and the growing prospect of another round of quantitative easing, we expect gold prices to continue to climb. Despite the rebound in net speculative length, it remains well-below levels consistent with the current low US real interest rate environment.
As we expect that the decline in US real interest rates will likely persist, and rates could even push lower in the near term should quantitative easing measures be undertaken by the US Federal Reserve, we are now raising our gold price forecasts to $1,400/toz, $1,525/toz, and $1,650/toz on a 3, 6, and 12 month horizon.
We also recommend opening a long Dec-11 COMEX gold position. The return to quantitative easing will likely be a strong catalyst to drive gold prices higher, and we expect the gold price rally to continue until US monetary policy begins to tighten. Our US economics team expects the US Federal Reserve to announce a return to quantitative easing measures as early as the November FOMC meeting. We see this acting as a strong catalyst to carry gold prices to the higher levels that we now forecast. While real gold prices have moved well above their long-term average near $450/toz, we expect them to be well-supported until US monetary policy tightens.
But it’s the following chart that really sells the (inflation-related) story:
As can be seen, that’s the relationship between the US 10 year TIPs yield (inverted) and the gold price. Generally speaking, then, since at least June 2009, the gold price has tracked the changes in the inversed TIPs rate rather faithfully– accounting, as it did, for changes in real-interest rate expectations.
This is interesting, because the role of gold as an inflation hedge has often drawn scrutiny. Simplifying the arguments: supporters of the “gold is a barbarous relic” argument point to entire epochs during which gold failed to track inflation altogether, while defenders of gold’s inflation-hedging prowess say the metal was only compromised in periods when controls like the gold standard were in place.
In any case, Goldman’s view is currently clear on the matter. When it comes to tracking the ‘real’ interest rate:
While the recent decline in US real rates suggests further upside to gold prices in the near term, our US economic outlooks suggests that US real interest rates will stay lower for longer and support a continuing rally in gold prices.
So, not only can investors expect gold to move higher as and when QE2 begins to bite — there’s a subtle hint there from Goldman that any further unconventional action from the Fed could very well feed through to rising nominal interest rates in the face of quite stagnant real-rates (as reflected by TIPs).
Which, of course, is because “real interest rates are the key determinant of gold prices over the medium term under stable monetary demand”, they say.
The conclusion in a nutshell then — as any self-respecting goldbug would always have told you — is that QE is good for gold:
Our US economic outlook suggests US real interest rates will stay lower for longer with renewed quantitative easing an effective catalyst to carry gold prices higher.
We had previously based our outlook for gold prices on the expectation that US real rates would remain in a 1% to 1.5% range; however, the recent deterioration in the US economic outlook and the prospect for renewed quantitative easing has brought 10-year TIPS yields below 0.50%. Our US economist and fixed income strategist outlooks suggest that these levels are sustainable and we expect this to support COMEX gold net spec positions at significantly higher levels and in turn push USD-denominated gold prices significantly higher.
Go Gold-man.
Related links: Gold as an Inflation Hedge? – University of Sterling Tips are the best - FT Alphaville Tipsy in the TIPS market - FT Alphaville The perils of releasing the repo rate - FT Alphaville
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