Goldman Sachs Group Inc. raised its forecasts for bullion prices as it scaled back expectations of U.S. Federal Reserve rate hikes over the next year, while remaining bearish on the metal’s prospects.
The bank increased its three, six and 12-month forecasts to $1,200, $1,180, and $1,150 an ounce from $1,100, $1,050 and $1,000 respectively, analysts including Jeffrey Currie and Max Layton wrote in a report dated May 10. Gold currently trades around $1,270.
“While the upside risks to gold pricing appear relatively limited from here, we see a number of catalysts for gold prices to moderate, including a more hawkish Fed and ultimately U.S. policy rate divergence, corresponding with gradual dollar appreciation over the next 3-12 months,” the analysts said.
Gold had its best quarter in 30 years through March, and that’s probably just the beginning of a rebound as global investors weigh the ramifications of unprecedented monetary easing on inflation, according to billionaire hedge fund manager Paul Singer in an April 28 letter to clients. This year’s rally has prompted some bears, including ABN Amro Group NV’s Georgette Boele, to reverse their outlooks, while BNP Paribas SA said last month that the metal may advance to as high as $1,400 over the next year.
Gold has surged 20 percent this year and vaulted over $1,300 last week as the outlook weakened for higher U.S. borrowing costs on concern about global growth, and as lending rates in Europe and Japan fell below zero. Holdings in bullion-backed exchange traded funds are the biggest since December 2013. Prices jumped 16 percent in the first three months, the biggest quarterly surge since 1986, fueled by volatility in global equities and concerns about China’s growth and yuan weakness.
“The risk-off environment which contributed to gold’s outperformance at the beginning of this year is less likely to repeat in the near future as confidence in Chinese growth, Chinese currency stability, and the potential for a collapse in oil prices is much reduced,” the Goldman analysts said.
Goldman revised its forecasts after the bank’s economists cut their prediction for U.S. rate increases over the next 12 months to 50 basis points from 100 basis points. The bank sees the next rate hike most likely in September but perhaps as early as July, on the back of gradual growth in the U.S. economy. Traders put the odds of a rate increase in September at 31 percent with July at just 17 percent, based on Fed-fund futures data.
The bank isn’t the only bullion bear. Societe Generale SA said in March that the rally this year is unsustainable, forecasting prices will average $1,075 in the fourth quarter. While Morgan Stanley raised its price forecast for gold, its average outlook for the third quarter is $1,150, still lower than current prices.