(Kitco News) – Goldman Sachs Group upgraded its gold forecast for the first time this year, upping its 3-month and 6-month projections to $1,575 and $1,600 an ounce in light of escalating trade war tensions.
Gold prices were solidly above $1,500 an ounce on Monday — a level that was hit last week for the first time since 2013.
After rising nearly 4% last week, gold’s rally is far from over, according to analysts at Goldman, who see more upside in the yellow metal.
“Gold prices have increased further as a weaker CNY sparked substantial U.S. and global growth fears. With growth worries likely to persist, gold could rise further, driven by an increased ETF allocation from portfolio managers, who continue to under-own gold. We raise our 3, 6, 12 month gold price forecasts from $1,450, $1,475, $1,475/toz to $1,575, $1,600 and $1,600/toz, respectively,” Goldman analysts said in a note.
The U.S.-China trade war has entered stage two this summer as U.S. President Donald Trump announced a 10% tariff on the remaining $300 billion worth of Chinese imports starting September 1, the note said.
“With the U.S. and China taking a harder line on trade, our economists no longer expect a trade deal before the 2020 president election—a fundamental change in view,” the analysts including Sabine Schels wrote on Wednesday.
A currency war with depreciating CNY plays a key role in trade war tensions and Goldman’s outlook for the precious metals.
“Previously, China opted for stability and defended its currency in order to facilitate the ongoing trade negotiations in the background. Now, FX appears to be playing an increasingly central role in the trade tensions,” the analysts said. “We estimate that a 10% depreciation of CNY vs USD would spell as much as 13% downside to the S&P GSCI industrial metals sub-index.”
Weaker CNY, in this case, means higher gold prices due to increased global growth fears, added Goldman.
“The depreciation of the CNY led to an increase in ‘fear’, lower long term U.S. rates, and thus a higher gold price. Thus, a substantial depreciation of the CNY could lead to more ‘fear’ regarding U.S. and global growth akin to early 2016 and should be bullish gold,” the analysts stated.
Gold’s ETF demand is also on a strong uptrend, with Goldman upping its 2019 forecast from 300 tonnes to 600 tonnes.
“Now with the DM CAI persistently low, the trade war escalating, global equities selling off and volatility spiking, it looks like our risk scenario is playing out. Indeed, gold ETFs have recently built momentum almost as strong as in 2016 and we believe that can be maintained in the short term,” the analysts said.