Friday, March 18, 2011

What Goldman Sachs thinks about gold right now

If you want to read a copy of the nine page report out of GS yesterday then mail me (for some reason I can't get it to download into the normal filesharing site) but here's the text from the front page that gives the quickread of contents below the fold. Suffice to say that Goldman likes gold (and who am I to argue?).

Gold set to rally as events send US real interest rates lower 

Optimism over the state of the global economic recovery at the start of the year, which drove US real interest rates sharply higher – and gold prices lower – has been tempered by the ongoing events in the Middle East and North Africa (MENA) and Japan, sending the 10-year US TIPS yield down to near 80 bp, setting the stage for the next gold price rally.

We expect gold prices to rally toward our 3-month price target of $1480/toz, and continue to recommend a long gold trade. While the protests and threat to oil supplies in the Middle East and North Africa drove COMEX gold prices to a new record high of $1437/toz on March 2, the events in Japan have paradoxically sent gold prices back below $1400/toz despite the ongoing decline in US 10-year TIPS yields. Given the decline in US real interest rates, we see the recent retracement in gold prices as offering a good buying opportunity, and maintain our long gold trading recommendation as we expect gold to rally to our 3-month price target of $1480/toz.

We see strong upside to gold prices in the near term, but continue to expect rising US real rates to lead prices to peak in 2012. We expect gold prices to move higher throughout 2011, but continue to believe that gold at current price levels is a compelling trade, not a longterm investment. In particular, we expect that as US real interest rates rise with the recovery in the US economy, gold prices will likely reach a peak in 2012.

We expect gold to rally following the recent events, but the PGM outlook is increasingly tied to the speed of Japan’s recovery. The sell-off in PGM prices accelerated after the Japanese earthquake, with platinum prices down 5% and palladium prices down 9% this week. While PGM prices softened with the rise in oil prices accompanying the MENA events, the recent declines reflect the potential loss of autocatalyst demand from idled automobile manufacturing in Japan. Not only does Japan account for 12.6% of global automobile production, it also accounts for a large share of global industrial PGM consumption: 16.4% for platinum and 18.1% for palladium in 2010.