Gold, Silver Surge After Goldman Recommends Buying Gold... Again

Gold continues its push to $1,400. The catalyst: Goldman's David Greely has just released a report on gold saying that: "we expect that gold prices will continue to rise over the next 12 months to our $1650/toz target as US monetary policy remains accommodative and US real interest rates remain low. Further, the Federal Reserve’s return to quantitative easing and the movement of gold prices to these new record highs could spark renewed investor demand for gold, which has been remarkably subdued in recent months. This represents upside risk to both our forecasts and to gold prices." As Goldman's last call on gold marked a temporary peak in the appreciation, as we expected, this time the top ticking effect will likely be lost. We believe that $1,400 gold to be breached as soon as today.

Some other perspectives from Goldman:

The FOMC announcement was widely anticipated, but while it was largely priced into the US TIPS market, it was not priced into the gold market. As we discussed in our last report, 10-year US TIPS yields had fallen to under 50 bps off the growing prospect of another round of quantitative easing. While speculative long positions had been building from arguably “oversold” levels, they were not building rapidly enough given the sharp decline in US TIPS yields, leaving the gold market arguably “under-bought.” We expect that the post-FOMC announcement rally that has carried gold prices close to our 3-month $1400/toz target has been driven by a sharp increase in net speculative positions, and we expect that ultimately, net speculative long positions will rise to a record 37 million toz given that US TIPS yields are below 50 bps.

Greely's specific recommendations are as follows:

Consumers: We expect gold prices to continue to rise from current levels as real interest rates should remain low on a continuation of quantitative easing in the United States. As a result, we believe that current gold prices provide an opportunity for consumers to layer in upside protection. However, longer term we continue to see considerable downside risk should the US Federal Reserve tighten monetary policy earlier than expected. Consequently, we recommend near-dated consumer hedges in gold, but more so in platinum where recovering global automobile demand will likely continue to put upward pressure on auto-catalyst demand and therefore on platinum and palladium prices.

Producers: While we expect gold prices to increase in 2010 and 2011, the rising risk of declining gold prices once the US Federal Reserve begins tightening monetary policy suggests this is a good time for gold producers to begin scaled up hedging of forward production, particularly for calendar 2012 and beyond.

While we agree, we see no mention of the RICO lawsuit on gold and silver prices, which even CNBC acknowledged is a factor in PM prices courtesy of the LBMA short squeeze we discussed yesterday, which has sent silver into the stratosphere.

Full report (pdf).