Goldman Sachs Forecasts Gold Prices To Peak At $1,750/oz In 2012

1 December 2010, 1:34 p.m.
By Kitco News
http://www.kitco.com/

(Kitco News) - Goldman Sachs sees gold prices peaking at $1,750 an ounce in 2012 as strong U.S. economic growth is expected in 2011 and 2012 and U.S. real interest rates will begin to rise, the bank said on Wednesday in a research note.

Goldman reiterated its forecast for gold for the next 12 months to rise to $1,690 and did not give any new trading recommendations. Their average gold price for 2012 is $1,700.

The bank said that gold prices will likely continue to trend higher in 2011, but there will be fewer catalysts for sharp price rises. Further, with downside risks likely rising as the calendar turns to 2012, they suggest investors use options to hedge risk. Specifically they suggest using a covered call option and fully finance a put option. A covered call means a trader buys a futures contract and sells a call option at a strike price above where they entered a long futures contract. The put option offers protection from falling prices.

“This strategy is especially appealing in the current environment as the gold options market continues to exhibit relatively high call skew and low put skew for medium-term options,” they said.

Goldman said with the low interest rate environment and the second quantitative easing, gold prices will continue to rise in 2011, but by 2012 a peak will be reached. “However, as we look toward 2012, we find it timely to reiterate our view that at current price levels gold remains a compelling trade, but not a long-term investment. Looked at over long horizons, the price of gold tends to revert to $450/toz in today’s dollars, and we expect that as US real rates begin to rise in 2011, we will see the cycle turn, and gold prices begin to move lower,” they said.

They said while they expect to see $1,700 gold on average in 2012, it’s “prudent’ for investors to take downside protection by that time.

Gold will peak in 2012 as the U.S. economy picks up and real interest rates rise. The bank raised its 2011 growth forecast to 2.7% in 2011 and expects an above-trend U.S. growth of 3.6% in 2012. They are also forecasting 10-year nominal rates at 3.75% by the end of 2012. “We expect that the gold price cycle will turn similarly to that of late 1980, though we expect far less violently,” they said.

By Debbie Carlson of Kitco News:dcarlson@kitco.com

<<Back to more Kitco exclusive news