Gold will soar 22% next year as investors protect against rising inflation, Goldman Sachs says

• Gold prices will break out of a tight trading range in 2021 as inflation worries stoke demand, Goldman Sachs analysts said in a note.
• The bank holds a $2,300-per-ounce price target for the precious metal, implying a 22% rally from current levels over the next 12 months.
• Though gold typically falls when long-term interest rates rise, the financial crisis disrupted the pattern and saw gold rise through 2012 as investors feared for strong inflation.
• Goldman expects a similar trend to materialize next year as recovery from the coronavirus recession fuels higher price growth.
• Watch gold trade live here.

Goldman Sachs expects gold to break out of its narrow trading range and soar through 2021 as the coronavirus recession gives way to higher inflation.

Bullion has hovered around $1,900 per ounce after its summer rally to record highs fizzled out in August. US election uncertainty fueled a brief rally, but new hope for a virus vaccine pushed investors out of safe havens and into riskier assets. In the near term, gold doesn't have a clear catalyst to lift or drag on prices, analysts Mikhail Sprogis and Jeffrey Currie said.

Yet the precious metal is poised to break out in 2021 as inflation concerns take center stage, they added. Goldman holds a $2,300-per-ounce price target for gold, implying a 22% rally from current levels over the next 12 months. Such a bounce would also place bullion at an all-time high.

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Gold prices typically fall when interest rates climb, but the 2008 recession showed the market focusing more on short-term rates. Even as longer-term rates moved higher, gold rose in the wake of the financial crisis as concerns around policy-fueled inflation lifted demand.

The metal will follow the same path next year, Goldman's analysts said. The Federal Reserve has indicated it will allow for a temporary overshoot of its 2% inflation target after a prolonged bout of weak price growth. Goldman's economics team sees inflation rising to 3% before weakening through year-end.

"This may well lead to market participant concerns over the long-term inflation rate and more inflows to gold in order to hedge it," the bank's analysts said. Expectations for a weaker dollar also support a disconnect between gold prices and long-term rates, the team added.

Goldman also expects demand for gold to strengthen across emerging markets. Chinese and Indian gold demand "already displays signs of normalization," and the likelihood of a Biden administration taking a softer stance on trade policy should further support the rally.

Gold traded at $1,888.87 per ounce as of 11 a.m. ET Tuesday, up roughly 25% year-to-date.

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