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Abu Dhabi, UAEFriday 16 November 2018

Fear of a US recession is good for gold, Goldman says

Bullion’s recent advance “happened on the back of the market sell-off and spike in volatility” say analysts

Chinatown in Bangkok, Thailand. The possibility of a US recession is the primary reason behind a rebound in gold investment demand, according to Goldman. Reuters
Chinatown in Bangkok, Thailand. The possibility of a US recession is the primary reason behind a rebound in gold investment demand, according to Goldman. Reuters

Goldman Sachs said that “fear” has made a comeback and gold is benefiting as stocks slide and investors fret more about the possibility that the US economy may tumble back into recession.

Bullion’s recent advance “happened on the back of the market sell-off and spike in volatility”, analysts including Mikhail Sprogis and Jeffrey Currie, wrote in a report on Tuesday. “In our view, it represents a rebound in fear-related demand for gold with ETFs beginning to build after several months of declines.”

Bullion is heading for the first monthly gain in seven months after equities slumped and trade-war concerns festered, hurting the outlook for growth. The US has a greater than 50-50 chance of tipping into a recession in the next two years, according to a model tracked by JP Morgan Chase. The spike in market worries regarding the possibility of a US recession have been the primary reason behind a rebound in gold investment demand, according to Goldman.

“While we think that the US cycle still has room to run it doesn’t mean that markets will not worry about it coming to an end,” Goldman said, describing US growth as “still strong”. Still the bank added: “Going forward, we expect market ‘fear’ of a US recession to strengthen. Recession worries and gold investment may increase further after US growth begins to slowdown.”

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Spot gold was at $1,228 an ounce on Tuesday. While that is up 3.1 percent in October, the metal is still lower in 2018 as the US Federal Reserve has pressed on with rate increases. Goldman described bullion’s fundamentals as solid, and kept its three, six and 12-month forecasts at $1,250, $1,300 and $1,350, but sees upside risks once US growth begins to slow.

The bank listed other reasons it was positive on bullion, citing prospects for central bank buying, higher core inflation in the US, and rising emerging market demand. It cautioned there may be some short-term headwinds related to volatility in emerging market currencies and the yuan in particular.

Next year the bank’s economists forecast a slowdown in US growth to 2.6 per cent from 2.9 per cent and a pick-up in core inflation to 2.5 per cent, it said. “This could make the US economy look increasingly like it is entering late-cycle inflation overshoot and further support gold investment.”