Goldman Sachs on Gold – “most immediate compelling upside opportunity”

Investment bank giant Goldman Sachs’ Commodities Research Team have come out strongly on gold’s prospects stating it is a “most immediate compelling upside opportunity”, citing the prospect of lower rates ahead, USD weakness and escalating geopolitical risk. Ultimately, that is about REAL rates coming down.

One of gold’s primary correlations is real rates, that is, nominal rates less inflation. Nominal rates are often quoted as the 10 year U.S. Treasury yield not the US Fed Funds Rate as it is more about what the market thinks rather than what the Fed wants.  2022 and 2023, as bond holders know painfully well, saw a big plunge in bond prices meaning rising bond yields (given the direct inverse relationship). Whilst inflation rose too, the rates won the fight and we saw rising real interest rates.  That would normally see gold decline and in 2022 that was indeed the case.  But then in late 2022, gold demonstrably broke that trend and started its secular rally that is still intact.

10 Year yield (inv) (R1) vs Spot Gold Price (L1) chart - 2 Year timeframe


The reasons for this break in that normal correlation are many.  In part it was ‘smart’ money looking forward and seeing where this must (and is) inevitably ends and front running the buying of gold. Those who follow our monthly Global Liquidity – Gold & Bitcoin updates will also know late 2022 marked the bottom of the global (critically, not just U.S.) liquidity cycle and gold’s correlation with that. New money is pouring into the global economy (in large part to pay the interest on all the debt and China trying to kickstart its economy) and gold LOVES that as it stands as the primary REAL money amongst all this new fake/Fiat ‘money’.

But as of late last year, as the general market started to see the Fed’s rate cutting cycle and injection of new money dead ahead, we saw the return of the real rates / gold correlation.

10 Year yield (inv) (R1) vs Spot Gold Price (L1) chart - 2 Month timeframe


Despite the global geopolitical tensions posing a threat to inflation, Goldmans are still in the falling inflation camp and so for them it is a nominal rates falling faster than inflation equation for the real rates correlation, but the geopolitical situation and quickly softening economy (be that the hard landing big recession or soft landing little recession) will drive the safe haven component as well.

On any account 2024 looks incredibly constructive for gold on multiple fronts and drivers. Goldmans have at least addressed the break in real rates driver in 2022 and 2023 that was confusing some ‘traditional’ buyers as now being removed and are constructive on Wall Steet coming back in via ETF’s etc because:

“participants are now focused on catalysts which can drive gold prices higher.

In that context, we note that ETF investment demand has yet to turn a corner and the COMEX speculative positioning data shows net length (currently at 87th percentile) have plenty of upside left.”