After a strong first nine months of 2019, gold peaked at a nearly 25% gain at the onset of September. Goldman Sachs remains bullish on the yellow metal.
Since then, as the S&P 500 increased more than 10 percentage points, the gold price declined 7 percentage points over the same period, for an increase of 17% on the year. Despite the pullback, Goldman is still bullish.
“Gold’s strategic case is still strong,” Goldman Sachs ’ Mikhail Sprogis, precious metals analyst at Goldman, wrote in a note to clients. “We expect ‘Fear’-driven investment demand for gold to be supported by late cycle concerns, political uncertainty and high [developing market] household savings.”
He highlighted how interest rates remain historically low, suggesting this is a bullish sign for gold, since there is a limited chance of bond prices rising, which could send investors to safehaven investments like gold.
Like Deutsche Bank, he believes “more widespread discussions of [Modern Monetary Theory] could lead to greater demand for gold on debasement concerns.”
Another reason for increased gold demand is increasing popularity of Modern Monetary Theory, MMT, which suggests national debt is not a constraint on countries. Bernie Sanders-advisor and economist Stephanie Kelton subscribes to this theory, as does Rep. Alexandra Ocasio-Cortez (D-NY).
Fiscal concerns around national debt are unfounded, proponents suggest, as long as inflation remains low. They suggest low rates should be taken advantage of in order to fund infrastructure and social programs to boost growth and reduce inequality.
“In the next recession, our US economists do not expect governments to adopt direct monetary financing and expect inflation to remain firmly anchored,” Sprogis wrote. “But this doesn’t necessarily prevent an increase in debasement concerns if conversations around MMT become more widespread — a potential boost to demand for gold as a debasement hedge.”
Goldman’s 12-month target for gold of $1,600 per ounce calls for an 8.5% gain from Monday’s opening price. In the past 12 months, gold has increased nearly 14%. Continuing political uncertainty could increase demand for gold.
“High political uncertainty due to continued trade tensions and the approaching US elections should also be supportive gold in 2020,” Sprogis wrote. “This uncertainty may be one of the reasons why we see evidence of a non-ETF vaulted gold build, as high net worth individuals may want to store gold outside the financial system.”