Gold prices are finally catching a long-awaited bid as inflation fears have subsided, and Goldman Sachs analyst Mikhail Sprogis said the upside move is only just beginning.
Sprogis reiterated his $2,000 an ounce price target on gold prices in a new research note this week, voicing optimism amid the backup in Treasury yields and easing inflation concerns.
"As a result of the liquidation, gold is now again pricing a Goldilocks scenario of moderate inflation and continued global recovery and is thus trading at a large discount to the current real rate. We estimate that the current gold price is consistent with a real rate of 0.1% vs. the -0.87% that is currently priced by the market. In our base case that the global recovery continues uninterrupted and inflation remains subdued, we expect this discount to persist and see just modest upside to gold, driven by only a small increase in real rates and a continued improvement in EM wealth," Sprogis contends.
Sprogis' price target assumes an 11% gain in gold prices from current levels.
To say the gold trade has been dead in the water may be an understatement, as investors have rotated into value stocks in a bid to drive returns during a sharp economic recovery. More recently, gold has fallen by the wayside as traders buy up big-cap tech stocks such as Apple and Amazon.
While gold prices have tacked on 2% in the past week, they remain 11% lower from the July 2020 record high of more than $2,036 an ounce. Silver prices have remained mostly steady during the same timespan. Copper prices have rallied nearly 50% due to the metal's role in rebuilding the industrial economy post-pandemic.
"Over the past several months, gold has been strongly correlated with the "inflation fear factor. Prices therefore corrected sharply after the hawkish Fed surprise which our economists interpret as the Fed taking a more backward-looking interpretation of average inflation targeting," said Sprogis. "This not only reversed the inflation trade but also removed the market's pricing of inflation tail risks."
Now it looks to be game (at least in the short-term) on for not only gold prices, but for correlated equities.
Shares of gold miner Barrick Gold are up 1.5% in the last week, slightly outperforming the S&P 500. The SPDR Gold Shares ET is up about 1.8%.
"In a scenario where the global economic recovery does not play out as expected or inflation begins to move materially above expectations, we see material upside to gold given its undervaluation and low allocation from the investment community. Therefore, we think that gold may be a good strategic purchase here for portfolio managers looking to hedge against tail risks of macro volatility," added Sprogis.
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