Is Goldman Sachs Too Pessimistic In Forecasting A 10% Gold Price Hike?

Goldman Sachs (GS) has just revised its predictions for the gold price for 2019. The Wall Street titan now predicts a good but not a great year for the yellow metal with its price rising a credible 10 percent to $1,425.

Actually, in the present troubled financial markets, it is rather strange that this classic safe haven and portfolio diversifier is not already priced much higher.

Looking Back

Then again, looking back at an article I wrote in late 2009 when Dubai was in $59 billion default and the world looked about to end, I was surprised to see that gold was then only priced at $1,195 an ounce.

But in 2009 the gold price did go up 25 percent, and I wonder if that is not a more appropriate benchmark for 2019 than the latest guidance from Goldman Sachs. Could it be that their precious metals’ team would actually agree, but house policy does not?

Still after 2009 all the real action for the yellow metal came in the next two years with the top in October 2011 of $1,923.

My then early support for gold as the most important asset class in that period was completely vindicated. Only silver delivered a better performance within any major asset class with investors tripling their money.

Could it be that history will at least rhyme if not exactly repeat itself? For while it is true that economic circumstances in the US are different from 2009, which does not have a subprime lending crisis, China’s 300 percent-to-GDP debt load is worrisome. 

Maybe this time round we will see a second Asian Financial Crisis like in the late '90s, only much bigger because China and this region are far more important to the global economy than they were 20 years ago. 

Wall Street Valuations Too High

On the other hand, a US stock market that became more overstretched comparing market capitalization to GDP - which peaked last October above 180 percent - than in the Great Crash of 1929 likely has a lot more downside than the current correction. Warren Buffett always gives this as his favorite yardstick for overvaluation, did he forget about it this year?

US politics are not exactly helpful either. Donald Trump has shut the US government down in his dispute with Congress over building a border wall. The longer this drags on, the bigger its impact on GDP. In addition, his high-profile trade war with China is ongoing and very bad for the world’s second largest economy given its current domestic slowdown and debt overhang.

The drop in Chinese luxury good sales and plunging tourist numbers are ominous as is the first fall in annual car sales in 20 years. The Second Asian Financial Crisis is happening but not yet recognised as such outside of the region. Hotels are empty again.

Meanwhile, Europe has been poleaxed by the Brexit crisis that still threatens at least continued stagnation in the UK economy, currently bottom of the G20 league table. Indian-owned UK car manufacturer Jaguar Land Rover is laying off 4,500 staff and Ford is downsizing by 1,000 staff in the UK. Even though it now looks almost certain that the Brexit will not happen, a surge in sterling when it is finally abandoned will hit its weak economy hard.

For the record, both Germany and Italy are actually in a recession right now. Japan is nearly there.

Gold Price Too Low

Americans are famously isolationist in their view of economics. But there is a whole world outside the United States and it is not in great shape at the moment. Even Dubai is struggling to emerge from an oil-induced slowdown of three years, albeit debts and overbuilding are not nearly on the same scale as 2009.

Perhaps it will take even more bearish news to produce a big reaction in the gold price, the classic safe haven in global financial crises, and lacks any real competitor with the recent bursting of the cryptocurrency bubble. 

For although it is true that the global economy may have to deteriorate significantly more for a reversion to interest rate cuts and quantitative easing, it is not difficult to imagine us getting to this position later in 2019. The Chinese have announced a stimulus package for small business this week, probably just a taste of what’s to come. In 2009 their market stimulus package was equivalent to half their GDP.

Then gold and especially silver prices would really lift off again. The serious money is already getting its act together.

M&A Restarting

Last week’s $10 billion acquisition of Goldcorp (GG) by Newmont Mining (NEM) is an indication that the precious metals sector itself is repositioning for a price increase. Newmont seems to have picked up a bargain with Goldcorp shares trading near multi-year lows. 

So follow Goldman Sach’s advice on buying gold in 2009 and you could get more than promised. Sure the US does not face the same Armageddon it did a decade ago. But there is a bear market brewing in stocks and a whole world of economic problems out there. 

Buying gold which is on a very different cycle to other assets, and left its bear market behind two years ago, makes sense. Revisiting a previous all-time high of $1,923 from $1,300 is possible, though even a 10 percent gain might look good for any asset class in 2019.

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Comments

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Ahmad Kamal 3 years ago Member's comment

Gold

Harry Goldstein 3 years ago Member's comment

What about gold? I take it you are a fan?

Peter Cooper 3 years ago Author's comment

I see Sam Zell has just bought gold for the first time ever. Now there is an opportunist worth following!

Alexis Renault 3 years ago Member's comment

Who is Sam Zell?

Peter Cooper 3 years ago Author's comment

US billionaire investor

Alexis Renault 3 years ago Member's comment

Thanks, you learn something new everyday!

Kurt Benson 3 years ago Member's comment

I certainly agree that $GS was a tad pessimistic. I mean come on, with all the uncertainty in just about everything right now, the only thing that is certain is that #gold is here to stay!

Michele Grant 3 years ago Member's comment

I'll never understand how so many people got caught up in the #crpyto craze rather than the proven safety and staying power of #gold.

Alexis Renault 3 years ago Member's comment

How did #Goldman come up with it's number?

Harry Goldstein 3 years ago Member's comment

Good article. Thanks for sharing.

David M. Goldstein 3 years ago Member's comment

I too was surprised that #gold hasn't risen higher. There's been so much craziness lately, sometimes it's nice to back to something nice, safe and reliable - G-O-L-D!