Goldman Sachs: Gold sell-off set to continue near term


Following the first round of the French presidential election n on Sunday, gold has
sold off by $12/oz to $1276/oz, alongside the decline in the French and Germany
yield spread and fall in VIX.
-We continue to expect gold will come under pressure in the near term, and
our 3-mo target remains $1,200/oz.
-This week is likely to continue to be volatile but should provide further catalysts
to the downside in our base case scenario, as we may see a rally in real rates
following the expected unveiling of President Trump’s tax policies on Wednesday
(or shortly thereafter), and as our US economists do not expect a US government
shutdown on April 29 (in their view, a shutdown this week has around a one in
four chance; if the debate extends to next week, it has a one in three chance).
-Anticipated bearish catalysts on a 3-mo view include a repricing of US rate hikes
(higher) and a QE reduction (faster) on the back of an increased expectation of US
tax reform delivery (cuts) and further solid US and global economic growth
(should the hard data confirm the survey data).
-In terms of downside support, in this piece we find that Chinese buying was key
in absorbing the ETF selling sub-$1,200/oz earlier this year, and would expect this
to be important again should we retrace to those levels.
-The main risks to this bearish near-term outlook are, in our view, increased
military tensions in North Korea and slower-than-anticipated US (and global)
growth; however, these developments are not our base case.
-Over the medium term, we would see our anticipated pullback as a buying
opportunity as our 12-mo target remains $1,250/oz. On a 12-mo view from
current prices, we still remain broadly agnostic on gold from current levels, as our
primary commodity view is one of a stronger cyclical backdrop; and how the Fed
responds to this environment, and hence the path real interest rates follow, is still
uncertain (US real rates are the primary driver of our gold pricing model).
-Nevertheless, our work within this piece points to some constructive
medium to longer term dynamics, including a weak supply growth outlook
based on the global gold capex cycle, high valuations in competing asset
classes (our year-end S&P 500 target is 2300 based on valuation concerns),
and a strong outlook for emerging market dollar savings which should
support demand growth.

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