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Did Goldman Sachs' Recent Gold Forecast Predict the Fed Will Print More Money?


" . . . more quantitative easing [may be] on the way for Europe and the U.S."

On Monday, banking giant Goldman Sachs announced it is staying long on gold. Due to low real interest rates, slower U.S. economic growth, and rising debt, the bank has also raised its gold forecast for 2012.

“We expect gold prices to continue to climb in 2011 given the current low level of U.S. real interest rates. Further, with our U.S. economics team now forecasting slower U.S. economic growth in 2011 and 2012, we expect U.S. real interest rates to remain lower for longer, supporting higher gold prices through 2012,” the Goldman report states.

The bank also said that the ongoing debt crisis in the eurozone is “skewing the balance of risks to higher gold prices.”

Ben Bernanke has already pledged to keep interest rates at all-time lows for at least mid-2013. Furthermore, the Federal Reserve recently slashed its economic growth projections for 2012. Fed officials now expect the U.S. economy to grow by 2.5 percent-2.9 percent next year, down from previous projections of 3.3 percent-3.7 percent made in June.

What strategy is the Goldman Sachs employing to take advantage of the current economic situation?

“With expiration approaching, we are rolling our outstanding long Dec-11 COMEX gold trade recommendation, entered on October 11, 2010 with an initial value of $1,364.2/toz and a current gain of $423.9/toz, into a long Dec-12 COMEX gold future position with a reference price of $1,800.5/toz,” said Goldman.

In English: Goldman was bullish on gold for 2011, and continues to be bullish on gold for 2012.

(Related: Gold and Thanksgiving)

The report also gives a short-term price forecast. For gold, the bank increased its forecasts:

  • Three-month forecast ▲ 7.0 percent to $1,760 a troy ounce [the standard measurement used for precious metals] from $1,645/oz
  • Six-month forecast 5.8 percent to $1,830/oz from $1,730/oz
  • 12-month forecast 3.8 percent to $1,930/oz from $1,860/oz.

Credit Suisse has also said that gold may climb over $1,800 in the coming days due to negative real interest rates as the key driver. However, with the Fed’s low interest rate pledge, negative real interest rates are likely to remain for a number of years. That being said, many expect gold prices to climb above $2,000 per ounce.

Dr. Walter de Wet, the Head of Commodity Research at Standard Bank in London, expects gold to hit $2,200 at the end of the first quarter next year. He believes more quantitative easing is on the way for Europe and the U.S., and does not see the Fed stopping its expanding balance sheet for another three or four years.

Standard Bank predicts that $500 billion of QE3 will add $200 to the gold price early next year.

In the middle of Goldman’s report is a very telling sentence that aligns the interests of Goldman Sachs and Standard Bank.

“Given our U.S. economists’ cautious economic outlook and the significant downside risks associated with the European turmoil, additional Fed easing might well be needed,” the report reads (emphasis added).

While the fundamental reasons for precious metals remain strong, Goldman going long on gold may also be a bet on QE3.

[Editors note: portions of the above are from a cross post that originally appeared on Wall St. Cheat Sheet.]

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