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Goldman Sachs Recommends “Gold: Time to Buy the Defensive Real Asset”

Many expected gold to post a new all-time high last year, which would have made two in a row. Alas, it didn't. Gold finished the year around $1,800, lofty but not as high as die-hard gold bugs wanted. Cue disappointed music? Not just yet.

A recent in-depth analysis by Goldman Sachs’ commodities research team went less into what happened in the gold market last year, and more into what is expected to go right this year.

Why wasn’t 2021 better for gold?

Optimism, belief in the Federal Reserve, and a general lag between economic reality and market sentiment were the dominant theme. So long as there was a Fed official willing to insist that inflation will subside, there were those willing to believe it. Despite consumer price spikes, the U.S. dollar kept its strength against emerging markets. And the trillions poured into the economy were only beginning to take effect.

Goldman refers to the concept of "anchored inflation", which would be the Fed's targeted inflation rate. A "drifting inflation" manifests in the form of inflation expectations to either side, and "deanchored inflation" in the form of inflation that is removed from the rate.

Gold’s performance during inflationary periods

The period between 1968 and 1973 was one where inflation fears were not representative of reality. In other words, market optimism. When the effects of inflation finally woke market participants up in 1973, there was the oil debacle, general macro volatility and a massive drive to preserve capital. In the event of "structural inflation" reaching just 4%, Goldman believes gold's natural price target would be $2,500.

This event would be marked by the Fed's unwillingness or inability to move inflation back to 2% and investors' increased awareness of this. Given that we had ended the year with an inflation rate above 6% for the first time in over three decades, and that the Fed is on record stating that it doesn't mind inflation running high, a path appears to be forming.

What’s different now?

With all the printed money and bailouts, the Fed now wants to tighten. The rate hiking cycle looks to be one for the history books for multiple reasons. Goldman points out that, contrary to popular belief, gold does well during periods of rate hikes. Yet this period is not like the others. The Fed has even less room to maneuver and rein in its ultra-loose monetary policy. Every rate hike, along with balance sheet reductions, will threaten economic stability.

If the economy is powered by loose monetary policies, tightening them can wreak havoc. This is why Goldman believes gold showed resilience as even real rates on 10-year Treasuries recently went up. Each hike and display of hawkish rhetoric will, at this point, worsen fears over a possible recession. Goldman's analysts have already noticed a surge in recessionary concerns and expect them to be prevalent if inflation persists into the second half of the year.

Here's a brief summary of the report’s key points:

  • Gold is a risk-off inflation hedge
  • Recession risk a key barometer for investors’ gold preference
  • Dollar stability and demand from emerging markets will push gold’s price higher
  • Commodity bull markets can boost global central bank buying
  • Gold is a hedge against “bad inflation”
  • Gold is the geopolitical hedge of last resort

The entire report is an interesting read; see for yourself (PDF link).

Coupled with recovered buying from both emerging market consumers and central banks, Goldman isn't lacking reasons to upgrade their year-end forecast…

Goldman’s gold price target for 2022

In sum, Goldman Sachs updated their 2022 price target for gold to $2,150 (up from a previous $2,000). To underscore things, they have also launched a long gold recommendation.

So if you want to take Goldman’s advice and buy gold bullion today, BullionMax has a variety of options, from 1 gram gold barsanyone can afford to gold bullion coins from around the world. Quite frankly, Goldman probably intends investors to play games with futures, options and other “paper gold” financial derivatives. We don’t believe contracts are a suitable replacement for “the geopolitical hedge of last resort,” especially for everyday Americans. You don’t need to pay $100,000 for a COMEX full membership seat either.

Here at BullionMax, we make buying gold bullion accessible for folks like you every day. That’s what we do!

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