Goldman didn't go far enough on gold

Goldman Sachs raises target price for spot gold to $1,200 an ounce. Did the venerable investment bank go high enough?

By InvestorPlace Nov 11, 2009 10:13PM
Gold © Comstock Images/JupiterimagesBy Jim Woods

I’ve written a lot about the U.S. dollar and gold lately, as has just about every financial pundit out there. The decline in the greenback and the nearly concomitant rise in gold are indeed intimately related, so it’s no surprise that as one financial instrument wallows in agony, the other revels in ecstasy.

The dollar, as represented by the U.S. Dollar Index (a measure of the dollar’s value vs. a basket of rival foreign currencies), now trades near its 52-week low, while gold just closed at a record high of more than $1,114 an ounce.

Goldman Sachs (GS) came out swinging on gold Tuesday, saying the price of the precious metal could rise to $1,150 to $1,200 an ounce. 

And what’s the reason for Goldman’s bullish gold call? The premier investment bank cited declining real interest rates and renewed buying interest by the world’s central banks. 

Goldman sees the recent sale of 200 metric tons of gold to India by the International Monetary Fund as a sign of an ongoing shift by central banks and governments around the globe from being net sellers of gold to net buyers of gold.

“The purchase by India highlights the growing trend of central banks and governments in the emerging economies to increase gold holdings as a means of diversifying their currency reserves,” Goldman said. 

But why do these countries need to diversify their reserves? Could it be that the dollar now is recognized as kaput?

I think the combination of horrible fiscal and monetary policy out of Washington, along with virtually no return on money, and no prospect of U.S. interest rates going up anytime soon, will keep pressure on the greenback for a long time. That pressure also will likely keep money flowing into the yellow metal for some time to come. 

On Monday, Bank of America (BAC) distributed a report saying gold probably will top $1,500 within the next 18 months. That report also cited the move by foreign central banks to hedge against declines in currencies, including the dollar.

I suspect that both the Bank of America and the Goldman calls are too conservative. I think gold could go as high as $2,000 an ounce within the next 12 months. I know this is a somewhat optimistic view of gold prices, but really, this call has nothing to do with optimism. 

Rather, it’s a realistic projection based on the realization that policymakers haven’t done anything to stem the bleeding in the dollar, and I don’t expect this group to do anything that will help the dollar. In fact, printing money and spending it recklessly will only fuel gold’s run higher.

Until we see some real fundamental change out of our policymaking elite, I’m building a shelter made of gold.

Click here to see How to Profit from the Gold Frenzy.

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