Source: Jin10 Data

Goldman Sachs responded to the market's widespread doubts about its bullish gold price view in its latest report and reiterated their view that the Fed's interest rate cut will drive gold prices higher. The institution reiterates its recommendation to go long on gold and sets 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, the price of gold rose to a historical high of $2,589.68 per ounce, thanks to a weaker dollar and expectations of a significant rate cut by the Fed. The Fed Watch Tool from the CME Group 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 rate cut.

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

"The Fed's rate cut will bring Western capital back to gold ETFs, which has been a missing key factor in the significant rise of gold over the past two years," Goldman Sachs analysts Lina Thomas and Daan Struyven said in a report.

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

"We believe that under the scenario of the Fed's 25 basis point rate cut on Thursday, there may be some tactical decline in gold prices, but we expect that as the Fed's easing cycle unfolds, gold ETF holdings will gradually increase, pushing gold prices higher and continuing to reach new historical highs. We reiterate our long-term recommendation to hold gold and our price target of $2,700 per ounce in early 2025. Since ETF holdings will only gradually increase 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 repeatedly hitting new highs, as central banks have increased their purchases and traders anticipate a shift towards monetary easing by the Federal Reserve. There is still disagreement among investors as to whether the Fed will start the easing cycle this week with a 50 basis point rate cut or in a more moderate manner with a 25 basis point rate cut, as Goldman Sachs expects.

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

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

Editor/Lambor