Michael Dalder/Reuters
- The structural bull market in gold is set to continue in 2021 despite a more than three-month downtrend since the start of August, Goldman Sachs said in a note on Friday.
- The short-term weakness in gold could likely be explained by the rotation towards value from defensive assets like gold and long term growth stocks, according to Goldman.
- In the near-term, gold will likely continue to consolidate sideways with no clear positive or negative catalysts, but expect more upside in the long term for these 3 reasons, according to the note.
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The more than 20% rally in gold year-to-date is set to continue into 2021 as the structural bull market continues on for the precious metal.
That’s according to Goldman Sachs, who said in a note on Friday that recent weakness in gold prices could be explained by the rotation towards value from defensive assets like gold and long term growth stocks.
In the short-term, gold prices could continue to consolidate sideways, as “it may be difficult for gold to generate meaningful momentum in either a higher or lower direction,” Goldman said. But in the longer-term, gold “should benefit from continued strong investment demand.”
1. “Inflation expectations move higher.”
“In this cycle, we believe the gold market, at least initially, is likely to follow the same path as after the Great Financial Crisis and grow strongly into the recovery phase of the business cycle as inflation concerns become central to the forecast,” Goldman said.
Goldman's economics team forecasts a temporary bounce in inflation to 3% next year, which could help spur demand for gold.
And with policies surrounding the COVID-19 pandemic focused on fiscal spending, combined with household balance sheets at better levels than they were coming out of the 2008 recession, "the Fed appears more willing to tolerate a temporary inflation overshoot," Goldman said.
"This may well lead to market participant concerns over the long-term inflation rate and more inflows into gold in order to hedge it," Goldman said.
2. "The US dollar weakens."
Goldman expects the falling US dollar to continue trending lower into 2021, which should help support gold prices.
"A breakdown in the correlation of gold and long term real rates has been pretty common with its correlation switching to the dollar and other commodities during these breakdown periods," Goldman explained.
"The breakdown of negative gold price changes and real rates correlation typically happens when the positive rates-dollar correlation disappears. This is the environment which our FX and rates strategists expect in 2021," Goldman said.
3. "Emerging Market retail demand continues to recover."
"We see a strong rebound in EM gold demand which should support higher gold prices through the wealth effect," Goldman said, adding that gold demand from China and India is already displaying signs of normalisation.
"Biden's election win and vaccine news should continue to push currencies of emerging market consumers higher as tariff risks are lower, supporting their purchasing power," Goldman added.
"The strategic case for gold remains strong in our view," Goldman concluded. The firm has a $2,300/toz gold price target, which represent potential upside of 22% from Friday afternoon levels.