Goldman Sachs responds to "counterpoint" doubts: Gold rising to $2700 is not unreasonable!

Goldman Sachs responded to the market's widespread doubts about its bullish view on the price of gold in its latest report, reiterating their belief that the Fed rate cut will drive gold prices higher. The institution 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 Fed policy meeting this week.

On Monday, gold prices rose to a historic high of $2,589.68 per ounce, benefiting from a weaker US dollar and expectations of a significant Fed rate cut. The Chicago Mercantile Exchange's Fed Watch tool shows that the market currently expects a 33% probability of a 25 basis point rate cut at the Fed's meeting on September 17-18, and a 67% probability of a 50 basis point cut.

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

"The Fed rate cut will bring Western capital back into gold ETFs, which has been a missing key part in the significant gold rally over the past two years," Goldman analysts Lina Thomas and Daan Struyven stated in a report.

However, Goldman also issued a warning to the market that a 25 basis point rate cut by the Fed on Thursday may slightly suppress gold. The bank stated:

"We believe that under the basic scenario of a 25 basis point rate cut by the Fed on Thursday, gold prices may experience some tactical declines, but we expect that with the arrival of the Fed's easing cycle, ETF holdings of gold will gradually increase, driving gold prices higher and continuing to hit historic highs. We reiterate our trading recommendation to hold gold long-term, with a price target of $2,700 per ounce in early 2025. Since the increase in ETF holdings will only gradually occur when the Fed cuts rates, this rise has not yet been fully reflected in prices."

This year, gold has been one of the best-performing major commodities, rising by about a quarter and hitting consecutive historic highs as central banks increase purchases and traders anticipate a shift to monetary easing by the Fed. There is still a divergence among investors on whether the Fed will kick off the easing cycle this week with a 50 basis point rate cut or, as expected by Goldman, with a more moderate 25 basis point rate cut.

Data shows that global gold-backed ETF holdings have rebounded in recent months after falling to the lowest levels since 2019 in mid-May. Despite the continuous surge in gold prices, ETF holdings year-to-date remain low, about 25% lower than the peak during the 2020 pandemic period.

Analysts state that the inflow of funds into ETFs backed by physical gold has "reduced the available supply of physical gold for trading in the market."