Gold upgraded at Goldman Sachs amid geopolitical risks (NYSEARCA:GLD)

Gold prices will end the year higher than previously expected as central banks in emerging markets keep accumulating real assets amid geopolitical risks, analysts at financial-services firm Goldman Sachs said in a report on Friday.

They raised their year-end target for the precious metal to $2,700 an ounce from the previous level of $2,300 an ounce. Gold in the past two months has rallied more than 20% and on Friday hit another record of more than $2,400 an ounce amid worries that Iran would attack Israel, potentially escalating war in the Middle East.

“The majority of the gold upside since mid-2022 has been driven by new incremental (physical) factors, not least a significant acceleration in emerging-market central bank accumulation as well as Asian retail buying,” Nicholas Snowdon, analyst at Goldman Sachs, said in an April 12 report.

Forecasting gold prices requires a new approach, he said, as the precious metal rises despite the possibility that the Federal Reserve this year will cut interest rates fewer times than previously expected. Higher rates typically drive greater demand for the U.S. dollar in relation to gold.

“Viewing gold as a barometer for fear and wealth is useful,” Snowdon said. “The fear component can be cyclical – 2000, 2008, 2020 – or more structural, where confidence in the dollar-backed international monetary system is challenged.”

A key difference between cyclical and structural fear is the correlation of gold with real rates, he said. A real rate is an interest rate that has been adjusted to remove the effects of inflation.

“If those who are buying gold are also buying Treasuries, their confidence in the system remains,” Snowdown said. “However, if gold and rates rise together, as they have in recent periods, that is signaling a clear shift in risk preference towards real assets.”

What Will End Gold’s Momentum?

Four major developments could curb the appetite for gold, according to Goldman. Less buying by central banks in emerging markets, either because of an easing of geopolitical tensions or because the banks had reached their targets for hard assets, are the first two.

“A peaceful resolution to ongoing issues in the Middle East and Ukraine, and a settling in associated sanctions risk,” the report said. “This would likely act as a constraint to emerging-market central bank buying.”

China’s efforts to support its property sector, which is straining under massive debt, may lead Chinese consumers to reduce their gold purchases. Finally, a hawkish tilt by the Fed to raise rates in its ongoing effort to curb inflation also would reduce demand for gold.

“The reality though is that the near-term potential for a combination of these developments is low, which underpins our expectation for continued bullish momentum in the gold price,” according to Goldman Sachs.