Why The Coming Few Years Could See A Brutal
Collapse For Gold
Earlier this week, Goldman Sachs came out with a note that said by
2018, gold would likely fall to $1200.
A lot of people chuckled at the idea of a 2018 outlook, as they
wondered what, exactly was the point of such a call.
Indeed, anyone holding gold right now might be more interested in
a note from the bank that came out later in the week which said
gold might spike in the coming weeks, thanks to debt
ceiling/fiscal cliff fears.
But for those interested in the actual dynamics of how gold
behaves, the 2018 call was actually extremely important.
Goldman's key line in its analysis was: "Assuming a linear
increase in US real rates back to 2.0% by 2018, as proxied by the
10-year US TIPS yield, we expect that gold prices will continue to
trend lower over the coming five years and introduce our long-term
gold price of $1,200/oz from 2018 forward."
As Eddy Elfenbein has done a great job showing, the primary driver
of gold is low real interest rates. When real interest rates are
very low or negative (as they have been in the US) gold rises.
When the opposite is true, gold falls.
Now, finally, people are talking about the eventual return to rate
normalization, and an increase in real interest rates in the US.
The US economy isn't totally out of the woods, but it's looking
more normal all the time. And that normalization has the potential
to be bad news.
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