LONDON (Commodity Online): Goldman Sachs is maintaining its 12-month target of $1,940 an ounce for gold. The metal fell in December in a scramble for U.S. dollar liquidity by European banks, which led them to lease gold for U.S. dollars, in turn driving gold lease rates lower.
While gold has retraced more than half of December’s decline, Goldman says the downward pressure from European bank funding issues has left gold prices at a steep discount to levels suggested by 10-year yields of Treasury Inflation-Protected Securities.
“As European funding pressures ease, we expect gold prices to converge upwards, back to levels implied by U.S. real interest rates,” Goldman said.
Goldman believes that many European banks will likely exit or sell many of their dollar-based businesses in 2012, substantially reducing dollar demand from the gold market, taking pressure off gold lease rates, and pushing gold prices back up in line with real interest rates.
“Further, following ECB’s aggressive action on funding through the Long-Term Refinancing Operation (LTRO), the near-term pressure on European bank funding has eased significantly,” Goldman concluded.
