Gold prices have rallied over the past 2 months, to be flat ytdGold has rallied by almost 8% since its July lows, leaving the price flat over the 2015 calendar year to date, which represents substantial outperformance relative to most other commodity prices (see chart below). Indeed, prices are near our forecast as we expected only a gradual decline in prices in 2015 (please see Central banks stall a more bearish gold outlook, published January 25, 2015).
The recent rally in gold has in our view been driven by a reduction in the market’s expectation of Fed rate hike during 2015, in turn a response to weaker US economic data, in part driven by a weaker EM outlook. A marked increase in Chinese official sector physical gold purchases during 3Q15 also likely supported gold prices.
Our economists continue to expect a 25 basis point rate hike at the December FOMC meeting (please see US Economics Analyst - Q&A on Fed Liftoff: Focus on the Data, published October 17 for details), and for a further 100 basis points of rate increases during 2016. However, our economists are only about 60% confident regarding December liftoff. As such, our base case remains for higher US real rates and lower gold prices, albeit with there being risks that the gold price weakness is pushed out further should the Fed surprise us and remain on hold in December.
Overall, our forecasts are unchanged, however we roll our forecasts along the existing price forecast path, such that our 3/6/12-month forecasts are $1,100/oz, $1,050/oz, and $1,000/oz, respectively.
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Here's the front page of the Goldman Sachs 'Precious Metals Update' report dated October 21st. The basic line is "yeah well we've been totally wrong about gold in 2015 so far but we're Goldman Sachs so screw you, we're right and you're all wrong, peasants"