Tomohiro Ohsumi/David Gray/Getty Images
- Gold is undervalued and has up to 38% potential upside if the economy slows, Goldman Sachs said in a Tuesday note.
- The bank expects gold to serve as a better inflation hedge than cryptocurrencies, the note said.
- "Overall we see crypto still far from becoming a defensive long-term store of value like gold," Goldman said.
- Sign up here for our daily newsletter, 10 Things Before the Opening Bell.
At about $1,800 per ounce, the current price of gold is pricing in a "goldilocks scenario" of moderate inflation and a continued global economic recovery from the COVID-19 pandemic, Goldman Sachs said in a Tuesday note.
But if inflation sees a higher than expected surge, or if the global economic recovery falters, there is significant upside to the price of gold, according to Goldman.
"In a scenario where the global economic recovery does not play out as expected or inflation begins to move materially above expectations, we see material upside to gold given its undervaluation and low allocation from the investment community," Goldman said.
The bank sees gold hitting as high as $2,500, representing 38% upside potential from current levels in the event that US investors' allocation to gold ETFs rises to its 2011 peak of 0.7% of their portfolio. Given the significant upside, Goldman views gold as a "good strategic purchase" for investment managers that want to hedge against tail risks.
Adding to the potential upside in gold is if the Fed under-reacts to rising inflation and and a slowing global economy. This scenario would drive investors to more defensive assets, according to Goldman.
"In our view, this implies gold can outperform cryptocurrencies, which we view as more risk-on inflation hedges. Overall we see crypto still far from becoming a defensive long-term store of value like gold," Goldman said.
But if the global economic recovery continues to hum along and inflation remains moderate, Goldman only sees gold hitting $2,000, representing potential upside of 10% from current levels. The price of gold is down 4% year-to-date.
"Ultimately, a number of uncertainties are still hanging over the global economy. Therefore, gold may be a good strategic purchase for portfolio managers looking to hedge against tail risks of macro volatility," Goldman concluded.