Goldman Sachs remained bullish on gold for the long haul due to potential of a “shock to the global economy” following the COVID-19 outbreak. Nevertheless, it trimmed the forecast for the next half year as a result of potentially less central-bank buying.
In particular, Goldman said, the sharp nosedive in crude-oil prices this month could mean Russia has less available cash to keep buying gold for its reserves.
Meanwhile, analysts said the expected damage to the global economy could be severe enough to wipe out the expected supply/demand deficit in palladium, sending prices lower.
Goldman analysts said “we maintain our bullish outlook on gold, as the larger-than-expected shock to the global economy will likely lead to greater risk aversion.” Thus, while the bank trimmed its three- and six-month forecasts by $100 each to $1,600 and $1,650 an ounce, analysts left their 12-month outlook at $1,800.
Gold prices plunged over the last week alongside risk assets. Like other analysts, Goldman said the main driver behind gold’s decline was a “run for cash” that resulted in long liquidation by bulls who collectively held an elevated long position in gold. Goldman compared this to the sharp drop at the start of the financial crisis in 2008, saying the metal fell 27.5% over a five-month period back then before beginning an ascent to above $1,900 an ounce.
Crude oil also fell sharply during the last week.
“Gold was also hurt by the fall in oil prices, as it brought Russia’s CB [central-bank] purchases to a halt and could possibly trigger some selling,” Goldman said.
Gold may remain volatile in the near term, but eventually the recent liquidity-driven selling will ease and “fear” demand will take over, Goldman said. In 2008, the turning point came when the Federal Reserve announced $600 billion of quantitative easing in November.