Over long term gold price should revert to cost

Goldman equity analysts Andrew Quail and Jitendra Pandey have increased their long term inflation adjusted gold price forecast to $1,200/ounce from $1,066/ounce. They recognize that gold is trading at about a 9% premium to their estimate and foresee the precious metal reverting back to a cost sustaining level. Such level, which Quail and Pandey estimate to be $1,200/ounce, comprises costs incurred to obtain gold that include extracting, storing, exploring and building infrastructure.

Gold Price

Gold provides inflation protection

Gold can help hedge against inflation. Goldman reports that gold prices are stable over long periods. In fact, gold prices were in a narrow range until the early 70s. Since then, the nominal price of gold has experienced larger swings. Quail and Pandey highlight that gold prices have a tendency to revert to the mean. In 2001, gold’s real price was close to levels seen in the 50s after reaching a record high in 1980. Gold’s nominal price peaked in 2011 and currently is in a downward trend. Goldman’s estimates account for gold prices keeping pace with inflation, which bring nominal prices in later years to be equal to the long term real forecast.

Gold Price

Bearish on gold for rest of 2014

Quail and Pandey expect gold’s nominal price to drop to $1,050 per ounce. Goldman is optimistic about U.S. economic growth and sees it accelerating in the second half of the year. Investor sentiment will likely improve and reduce demand for gold as a safe haven asset. Cold weather dampened economic growth and Ukraine’s crisis started during the first quarter of 2014. These events drove gold prices higher between January and mid-March. In subsequent quarters, U.S. economic indicators suggest faster growth but tensions have worsened in various regions including Ukraine and the Middle East. Gold prices have traded in a narrow range staying close to $1,300 per ounce.