Goldman Sachs is clear that precious metal prices will continue to rise until they approach $4,000 by the end of the year.
TWO MAJOR CATALYSTS
The thesis of the New York entity regarding gold is clear: it remains the ultimate safe haven. This, despite the sharp decline in stocks leading investors to sell liquid assets like gold to raise cash to serve as collateral against their positions in the stock market, causing a 5% drop in the precious metal.
"We've seen this before in 2008, 2020, and even in August 2024. Times like these are good buying opportunities because gold usually rebounds shortly after when investors seek safe assets," says Lina Thomas, analyst at Goldman Sachs Research.
Normally, gold is considered a safe haven, strengthening in times of volatility and when stocks fall. And the long-term narrative for gold is, according to the American firm, very positive.
Firstly, because central banks have been buying gold massively in recent years. The turning point, Thomas notes, was marked by the war in Ukraine, as G7 countries responded to Russia's invasion by freezing over $280 billion in Russian assets.
Those holdings were mainly securities in euros, but also in US dollars and other currencies. Most of those foreign assets were in Brussels and served central banks to continue buying gold.
Specifically, Goldman Sachs Research estimates that gold purchases by central banks in the London over-the-counter market have increased fivefold. And the American firm expects this acquisition trend to continue for at least three more years.
"What we've seen since 2022 is this impressive increase, this great boom. Central banks are structurally raising the price floor by constantly reducing the amount of gold available for trade in the market. As a result, even during corrections, the new lows are higher than the prices of previous weeks," notes Thomas.
Moreover, central banks in emerging markets, which have a lower percentage of their reserves in gold, are also trying to catch up with their counterparts in developed markets. Notably, China has less than 10% of its reserves in gold, compared to around 70% or more in the US, Germany, France, and Italy. "The global average is around 20%, which we consider a plausible medium-term target for major central banks in emerging markets," Thomas emphasizes.
On the other hand, interest rates have historically been one of the most important dynamics in the price of gold. Since the metal does not generate returns like bonds, it becomes more attractive when interest rates are low (and vice versa when bond yields are high). And interest rates are falling, especially in Europe.
This is causing private investors to once again make capital flow into exchange-traded funds (ETFs) backed by gold.
According to Goldman Sachs Research, gold-linked ETFs have about $294 billion in assets under management, which approximately represents around 3,000 tons of the material. Pension funds and small retail investors own most of these gold ETF investments.
ETF holdings usually closely follow interest rates. For this reason, gold prices have historically been correlated with rates. More recently, purchases by central banks have caused some divergence, but Thomas says that the influence of rates has not completely disappeared.
"While ETF holdings closely follow rates, they tend to exceed them significantly when recession fears increase. We are seeing a strong rise in ETF holdings, beyond the level that a rate-based model would suggest, as investors fear a possible recession," highlights this expert.
