In times of economic uncertainty, commodities are often viewed as a safer investment alternative to stocks, serving as the foundational materials that drive societal functions. However, a recent report from Goldman Sachs indicates that the current landscape poses significant risks for many popular commodities, with gold emerging as the premier safeguard against value erosion.
Analysts at Goldman Sachs assert, “We strongly believe in the diversifying role of commodities in investment portfolios based on several structural drivers, including commodities’ hedging role against supply disruptions, not an uncommon occurrence in energy, and the potential for sharp rallies in select industrial metals driven by a combination of long supply cycles and structural green metals demand growth associated with energy security and decarbonization investment.”
Despite this belief, the firm has decided to recalibrate its strategies in light of a softening cyclical environment. “However, given the current softening cyclical environment, we opt to tactically close our 2024 Deficits Basket trading recommendation with a potential gain of 8% and focus on our highest conviction views in the current environment, namely higher implied oil volatility, long gold and short long-dated European gas,” the analysts noted.
The surge in gold purchases by central banks has been remarkable, with the Kobeissi Letter reporting, “Global net gold purchases by central banks reached 483 tonnes in the first half of 2024, the most on record.” This figure represents a 5% increase over the previous record of 460 tonnes set in the first half of 2023.
In the second quarter of 2024, central banks acquired 183 tonnes of gold, reflecting a 6% year-over-year increase, although this was 39% lower than the 300 tonnes purchased in the first quarter, as highlighted by the Kobeissi Letter.
Goldman Sachs remains optimistic about gold’s prospects, stating, “Gold stands out as the commodity where we have the highest confidence in near-term upside.” The firm has set a bullish target of $2,700 per ounce for early 2025, driven by three key factors.
First, the analysts believe that “the tripling in central bank purchases since mid-2022 on fears about US financial sanctions and US sovereign debt is structural and will continue, reported or unreported.”
Second, they anticipate that “imminent Fed rate cuts are poised to bring Western capital back into the gold market, a component largely absent of the sharp gold rally observed in the last two years.”
Finally, they emphasize that “gold offers significant hedging value to portfolios against geopolitical shocks including tariffs, Fed subordination risk, and debt fears.”
Their analysis suggests a potential upside of 15% in gold prices should financial sanctions rise similarly to the increases seen since 2021, or if US CDS spreads widen by one basis point. “That said, due to the particularly price-sensitive Chinese market digesting the recent price rally, we have adjusted our $2,700 target to early 2025 vs year-end 2024 previously. However, we believe that that same price sensitivity also insures against hypothetical large price declines, which would likely reinvigorate Chinese buying,” the analysts added.
The Kobeissi Letter raises an intriguing question: “Why are central banks calling for a ‘soft landing’ while stocking up on gold?”
As Goldman Sachs maintains its bullish outlook for gold into late 2024 and early 2025, the ongoing demand from central banks is expected to further bolster prices. However, the yellow metal must navigate through September, historically a challenging month since 2016.
With governments around the globe continuing to print debt at unprecedented levels, the prospects for gold remain strong. “But with governments worldwide continuing to print debt like there is no tomorrow, there’s a strong chance that the strength shown by gold in the first half of 2024 will continue in the second half and beyond as the primary result of debt printing is currency debasement,” the Kobeissi Letter concludes.
As the economic landscape evolves, gold’s role as a protective asset appears more critical than ever.
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