On Wednesday, Goldman Sachs upped the ante on its call that 2013 will mark the end of a long-running bull market in gold by introducing a new forecast: the bank’s commodity strategists see the shiny yellow metal falling to $1200 per ounce by 2018.
However, despite having a bearish 5-year forecast for gold prices, Goldman’s 3-month forecast is actually quite bullish. In fact, strategists Damien Courvalin and Alec Phillips write in a note to clients today that they expect gold to reach $1825 per ounce over the next few months – up from current prices around $1690 – as the debt ceiling debate drags on in the United States.
“As a result, with gold prices up only modestly over the past week, we see current prices as being a good entry point to re-establish fresh longs in the gold market before the run up to the debt ceiling debate,” Courvalin and Phillips write.
The strategists use a number of charts to illustrate their thesis. The first shows how gold prices ran up in 2011, when Congress faced the same debate about raising the debt ceiling:
However, given a number of global macroeconomic factors adding to uncertainty at the time, Courvalin and Phillips concede that the debt ceiling debate itself did not contribute all $150 to the run-up in prices during that episode.
Still, the two point out that there have been six debt ceiling debates in recent memory – and during three of those debates, gold rose 10 per cent:
The Goldman strategists write:
There were six instances between 1996 and 2007 when the debt limit was reached and the Treasury resorted to using “extraordinary measures”. For half of these, gold prices rallied by c.10% in the month leading to the increase of the debt limit, a similar magnitude to that in 2011 (Exhibit 6). Finally, there is only one precedent that we are aware of, in July 1957, when the Treasury exhausted its borrowing authority and was forced to delay scheduled payments.
Contemporary observers cited failure to make payments to government contractors as a contributing factor in pushing the US economy into recession. The impact was exacerbated by the fact that the debt limit actually declined as it had only been temporarily raised for a year back in July 1956 (temporary increases in the debt limit were the norm until the 1980s). And while gold prices did not trade at the time, the subsequent 15% decline in the Dow Jones Industrial Average suggests a potential significant move in gold prices.
It’s unclear what the impact on gold will be this time around, but it even has the bearish-gold types over at Goldman hopeful for a short-term boost.