Goldman Sachs (NYSE:GS) recently stated that it sees gold's rally as fleeting, believing it will drop to $1000 per ounce by the end of the year. Contrary to Goldman, we remain bullish on the precious metal and see further gains this year.
Sourced from Bullion Vault.
Why are Goldman Sachs betting on an almost 17 percent decline in bullion?
Goldman Sachs is defying the rest of the market by still believing there will be three interest rate hikes by the Federal Reserve in 2016, which is actually a sensible reduction from the four it was previously expecting. It has hinted that each rate hike will knock gold down by around $50 an ounce. Stating that it sees bullion dropping to $1,100 in three months, then $1,050 in six months and finally $1,000 in 12 months. We completely understand the logic behind Goldman's gold forecast. We are sure many readers would agree that If there were three rate hikes this year then there is a strong chance that gold would decline to $1,000 an ounce or even below. After all, who needs the safe-haven of gold if the US economy is strong enough for three rate hikes. But after Janet Yellen spoke in Congress this week we find it hard to fathom how three rate hikes could possibly occur this year. At best it is looking like one rate hike from the Fed. We have previously had the view of more than one rate hike in 2016, but like many market commentators, we have had to revaluate our view considering the state of the global economy and financial markets. We just don't believe that the US economy is strong enough at present to withstand three rate rises this year.
The bank also pointed out a downside risk in Russia and China reducing their bullion purchases. It makes a fair point about Russia, but China still has an overwhelming appetite for gold that we don't see stopping any time soon. Admittedly, as China is estimated by Wells Fargo to be purchasing 40 percent of all the gold that is pulled out of the ground each year, we feel a drop in demand from China would cause oversupply issues and a pull back in price. As a lot of the gold imported is apparently going into the hands of wealthy Chinese, we don't see any reason why this should stop. This is a country which last year overtook the United States as the country with the most billionaires after all, as well as having the largest middle class population in the world estimated to be 109 million adults. For this reason we feel confident Chinese demand will continue for the foreseeable future despite concerns of an economic slowdown there.
Sourced from Bloomberg.
We think that the continued volatility will send gold even higher.
At the moment the only index that seems to be rising is the VIX, also known as the CBOE Volatility Index, which is pictured above. Being a measure of volatility there is a strong correlation between its rise and the rise of gold. When investors get spooked by the unpredictability of volatile markets they invariably flight to gold. With oil prices hitting new lows we only see volatility getting worse in the weeks ahead. Let's not forget also that this week the Chinese markets have been closed. How they react to this week's market events, such as the Nikkei 225 dropping dramatically and the fall in commodities, promises to make financial markets very unstable next week.
We also think that the intense speculation surrounding central banks' next moves will contribute to an increase in volatility. With many of the world's largest central banks teetering on interest rate decisions to counter low inflation, nobody quite knows what is going to happen next. This could lead more and more investors to bullion.
We happily went long on gold at $1,180.
We felt confident enough to open a long position at $1,180 and fully expect gold to rise to $1,400 this year. We doubt it will be as plain sailing to $1,400, as it was from $1,060 to $1,200, but there is certainly a lot of fear in the markets that could propel gold to these heights sooner rather than later. Should gold hit $1,400 it would be a return of approximately 16.5 percent from where gold was trading at the time of writing.
For those that are very bullish on bullion the ProShares Ultra Gold ETF (NYSEARCA:UGL) could be a good option. This ETF doubles the return on your gold investments, but use with caution, it also doubles your losses. As we mentioned above, our target price is approximately 16.5 percent away from the current trading price. Doubling up with UGL would give you a 33 percent return if everything went to plan.
As far as ETFs go our preference is the regular old SPDR Gold Trust ETF (NYSEARCA:GLD). These are volatile financial markets after all, and let's be honest, nobody quite knows what central banks are thinking these days. Some believe the economic uncertainty that the world faces could lead to unconventional moves by many central banks, much like that Bank of Japan's negative rates, so it really can pay to be conservative.
Best of luck with your trades!
Disclosure: I am/we are long GLD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.