The first of many gold price upgrades is here, as Goldman's David Greely finally catches on to what has been all too obvious to anyone with a frontal lobe: "Gold prices hit a new record high last week, closing at $1,663/toz on August 3. Despite this rally, the rise in gold prices has continued to lag the plunge in US real interest rates, with 10-year TIPS yields trading below 30 bp. With our US economics team lowering their outlook for US economic growth, implying US real rates will remain lower for longer, and with sovereign debt issues in both the United States and Europe intensifying, we are raising our gold price forecasts to $1,645/toz, $1,730/toz, and $1,860/toz on a 3, 6, and 12-month horizon, respectively." Next up: everyone else.
Gold prices rise to record high as 10-year US TIPS yields plunge to a record low
Gold prices have rallied strongly since the beginning of July, rising 12.2% to a record (nominal) high close of $1,663/toz on August 3. While the rise in gold prices has been sharp, it continues to trail the fall in US real interest rates. In particular, 10-year US TIPS yields plunged from 77 bp to a mere 24 bp over the same period, according to the US Federal Reserve. Consequently, despite this rally to yet another new record (nominal) high, we believe that gold prices will continue to rise as: a) 10-year US TIPS yields are at an historic low; b) a diminished outlook for US economic growth suggests US real rates will remain lower for longer; c) gold prices in inflation-adjusted terms remain well-below their 1980 highs; and d) sovereign debt concerns have intensified in the United States and Europe.
Raising our gold price forecasts as the diminished outlook for US economic growth suggests US real interest rates will remain lower for longer
We had expected gold prices would continue to rise through the middle of 2012, when we expected rising US economic growth would push real rates higher and gold prices lower. However, with our US economics team now lowering their outlook for US economic growth to 1.7% in 2011 and 2.1% in 2012, we now expect real interest rates will remain lower for longer, and we are now raising our gold price forecasts to $1,645/toz, $1,730/toz, and $1,860/toz on a 3, 6, and 12-month horizon, up from our prior forecasts of $1,565/toz, $1,635/toz, and $1,730/toz, respectively. Net, this revision in effect pulls forward the higher prices we expected on a 6 and 12-month horizon – as US economic growth has been slower, and US real interest rates lower, than previously anticipated – and extends the upward trajectory for gold prices through 2012. Further, the recent escalation of sovereign debt concerns suggests that the near-term risk to our new forecast is skewed to the upside, and we continue to recommend long trading positions in gold.
And full note: