Goldman Stands by Gold Even as Price Drops

May 10, 2012 at 13:30

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In what can only be viewed as unsettling news for gold holders, Goldman Sachs Group Inc. (GS) stood by its forecast for a rally in gold this year, saying that the precious metal will advance to $1,840 an ounce over six months as the U.S. central bank embarks on a third round of stimulus in June.

Gold remains the “currency of last resort,” according to analysts led by Jeffrey Currie in a report dated yesterday, the same day that the price sank to the lowest level in four months as Europe’s escalating debt crisis boosted the dollar. The restated gold forecast implies a 16 percent surge.

Concerns that Greece may leave the euro reignited Europe’s crisis this week, driving commodities including gold lower along with base metals, crude oil and equities as the dollar climbed. The 17-nation euro area is on the verge of losing one of its members, according to a Bloomberg Global Poll published today.

“In early 2009, we suggested that gold had become the currency of last resort, overtaking the U.S. dollar’s status due to the rising risk of sovereign default and debasement concerns,” Currie wrote. Even as the U.S. currency advanced and gold fell on the European crisis in recent months, “it is too early for the dollar to reclaim this status,” he wrote.

Gold for June delivery on the Comex dropped 0.3 percent to $1,589.30 an ounce at 5:25 p.m. in Singapore, declining for a fourth day as Greek leaders struggled to form a government following elections at the weekend. The metal, which has lost 17 percent from its all-time high of $1,923.70 in September, is on course for a fourth monthly drop in May.“The case for higher gold prices remains in place,” the analysts wrote. “U.S. economic and employment data has now disappointed for several weeks, European election results point to further stress in the euro area, while anecdotal data suggests that physical gold demand remains resilient.”

The U.S. Federal Reserve will announce additional monetary easing when policy makers meet next month, Jan Hatzius, chief economist at New York-based Goldman, predicted in a report on May 8. The central bank bought $2.3 trillion of bonds in two rounds of quantitative easing from December 2008 to June 2011 to drive the recovery in the world’s largest economy.

U.S. payrolls climbed by 115,000 workers in April, the smallest increase in six months, Labor Department reported last week, boosting concern that the recovery may falter. The jobless rate fell to a three-year low of 8.1 percent as people left the labor force, adding to worries that the expansion is cooling.

Gold, which has still risen 1.4 percent in New York in 2012, has rallied for 11 straight years as investors sought a hedge against inflation and central banks expanded reserves. Holdings in bullion-backed exchange-traded products are at 2,382.016 metric tons, about 1.2 percent below the March 13 record.

Emerging-market central banks continued to purchase gold for reserves, while demand in largest user India may gain after the government withdrew an excise tax on precious-metal jewelry, the analysts wrote. A jump in imports into mainland China from Hong Kong also pointed to strong growth in demand, they wrote.

Goldman’s forecast for additional easing from the U.S. central bank is similar to that from Bill Gross, who runs Pacific Investment Management Co.’s Total Return Fund, the world’s largest mutual fund. A decision to buy more debt is “getting closer,” Gross wrote on Twitter this week.