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Currency debasement to drive gold price to $2,300 in 12 months – Goldman Sachs

A fear of rising inflation, growing government debt and concerns that the U.S. dollar is embarking on a new downtrend are all factors that will push gold much higher, according to commodity analysts at Goldman Sachs.

In a report Tuesday, analysts at the financial firm reiterated their view that gold will be the currency of last resort; they also increased their forecast for the precious metal.

The bank now sees gold prices pushing to $2,300 an ounce within 12 months and silver prices rising to $30 an ounce, up from the previous forecast of $2000 and $22, respectively. The comments come as momentum in the gold market has slowed slightly after its historic run to a new all-time high. August gold futures last traded at $1,932.60 an ounce relatively unchanged on the day.

The analysts see the potential for higher inflation as governments debase their currencies to deal with burgeoning debt. The bank’s gold forecast is also in line with its inflation expectations for five-year treasury inflation protection securities (TIPS) falling to -2%.

“This relentless decline in real interest rates against nominal rates bounded by the US Fed has caused inflation breakevens to rise in an environment that would ordinarily be viewed as deflationary,” the analysts said. “Ironically, the greater the deflationary concerns that policymakers must fight today, the greater the debt build up and the higher the inflationary risks are in the future.

Although gold is not the great hedge against inflation compared to other commodities like oil and base metals, the Goldman Sachs analysts said that it is the best asset in the current environment because it appears that inflation will be driven by currency debasement.

“When discussing the drivers of investment demand for gold and commodities, it is important to distinguish between debasement and inflation. The key is that the current debasement and debt accumulation sows the seeds for future inflationary risks despite inflationary risks remaining low today,” the analysts said.

Goldman expects that investment demand in developed markets (DM) will continue to drive prices. Although physical demand in emerging markets (EM) will remain muted, they said that they expect it to eventually pick up from current low levels.

“EM consumers are being squeezed out of the market as opposed to opting out,” the analysts said. “We will likely see this demand materialize when price stabilizes somewhat and DM investment purchases slow down, creating more room for EM consumers. We feel that for now, investors should not be concerned by weak EM demand prints.”

The bank is also bullish on silver, seeing prices push to $30 an ounce next year. The analysts said that they expect higher gold prices and improved industrial demand to drive silver higher with the gold-silver ratio falling back to within historical norms.

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