In its latest report, Goldman Sachs responded to widespread skepticism about its bullish view on gold prices and reiterated its view that the Fed's rate cuts will drive gold prices higher. The agency reiterated its long gold trading recommendation and set a price target of $2,700 per ounce in early 2025, citing central bank demand and the upcoming rate cut at the Fed's policy meeting this week.

Gold prices rose to a record high of $2,589.68 an ounce on Monday, helped by a weaker dollar and expectations of a sharp rate cut from the Federal Reserve. The market now sees a 33% chance of a 25 basis point rate cut and a 67% chance of a 50 basis point cut at the Fed’s Sept. 17-18 meeting, according to the CME’s FedWatch tool.

Goldman Sachs noted that while higher structural demand from central banks has reset the relationship of price levels, changes in interest rates continue to drive volatility in gold prices. The bank noted that exchange-traded funds (ETFs) backed by physical gold have been rising steadily as the Fed's policy rate has fallen.

“Fed rate cuts will bring Western capital back into gold ETFs, a key missing piece of gold’s dramatic rally over the past two years,” Goldman Sachs analysts Lina Thomas and Daan Struyven said in a note.

However, Goldman Sachs also warned the market that the Federal Reserve's 25 basis point rate cut on Thursday could slightly weigh on gold. The bank said:

"We believe that in the base case of a 25 basis point rate cut by the Federal Reserve on Thursday, there will be some tactical declines in gold prices, but we expect that as the Fed's easing cycle arrives, gold ETF holdings will gradually increase, which will drive gold prices higher and continue to set new historical highs. We reiterate our long-term gold holding trading recommendation and our gold price target of $2,700 per ounce in early 2025. Since ETF holdings only increase gradually when the Fed cuts interest rates, this increase has not yet been fully reflected in prices."

Gold has been one of the best performing major commodities this year, gaining about a quarter and hitting record highs as central banks increase purchases and traders look ahead to a shift to monetary easing by the Federal Reserve. Investors remain divided over whether the Fed will kick off the easing cycle this week with a 50 basis point rate cut or a more modest 25 basis point cut as Goldman Sachs expects.

Data shows that global gold-backed ETF holdings have rebounded in recent months after falling to their lowest level since 2019 in mid-May. Despite the continued surge in gold, ETF holdings remain low so far this year, about 25% below the peak during the 2020 epidemic.

Analysts said that because ETFs are backed by physical gold, inflows "reduce the supply of physical gold available for trading in the market."

The article is forwarded from: Jinshi Data