Goldman Sachs Still Bullish on Gold, Despite Raised Rates

via Peter Reagan

Your News to Know rounds up the most important stories about precious metals and the overall economy. This week, we’ll cover:

• The Fed used to intervene with rate cuts for economic easing…
• …now it’s intervening with hikes to rein in inflation, high-strung economy be damned
• What does this monetary experiment tell us about the future of American money?
• Goldman sees $5,400 by 2027 as Fed plays hot potato with interest rates
• Oktoberfest sobers up beer-enjoyers in regards to loss of purchasing power

The Fed proves me wrong at the expense of reason, logic and precedent

I not only enjoyed Forbes’ response to my open query, but also their framing of interest rate moves over the last 35 years.

As you might have seen two weeks ago, I wondered openly if the Federal Reserve ever hiked rates inside a cutting cycle going back a century. Most gauges follow this to the early 1980s only, and the Forbes article starts with 1990.

As you might have also noticed, I predicted the Fed would not hike rates inside this cutting cycle because it never has. And the Fed did the opposite, hiking by 25 basis points – sort of.

Why do I say “sort of”? Well, the Forbes article places this hike inside the cutting cycle, which I’ll have to dissect in a moment.

When we look back 35 years, there is a precedent: A one-tap rate hike in 1997 amid cuts between 1995-1998.

But that environment has little to do with today’s. Inflation was 1.94% and we were inside a 10-year economic boom that the Fed was wanting to keep on track. As the LA Times said at the time:

“Ironically, the action comes at a time when inflation is at a 30-year low, with wage increases firmly in check and no major economic distortions seeming to threaten the six-year economic expansion.”

Today? Inflation is nearly 4%, we’re seeing a mixed bag of economic news and the Fed is desperate to rein in inflation. To “regain credibility,” as Bloomberg reporters often say.

Now, Forbes places this hike inside the 2024-2026 cutting cycle instead of giving it a separate entry. That tells me they believe that we are still inside a cutting cycle.

What’s all this talk about “cycles”? It’s like this: Any time the Fed makes changes to interest rates (up or down), their next move is more likely to be like the last one than anything else. In other words, when rates go up they tend to keep going up, and vice versa. That’s why we keep talking about a hike inside a cutting cycle – my take is that rates will trend down rather than up. That the next Fed move is more likely to be a cut than not.

Back in 2023, the Richmond Fed published an article called “A Rate Cycle Unlike Any Other.” It has only gotten more so since.

What we do know is that we’ve seen six interest rate hiking cycles since 1998. Four produced recessions. The one in 1994-1995 didn’t, but like I said, it happened during a decade-long economic boom. Back then,

Cushions were abundant then – the personal savings rate was more than double today’s, for example. Household reserves simply don’t exist anymore. I’m skeptical that the Fed can continue raising interest rates today, not because of what the President says on Truth Social. Because of the $40 trillion national debt, and the Treasury Department’s quarterly refunding needs (which are truly massive).

Over the last few months, I’ve outlined two scenarios for the months ahead, one cutting, one hiking, but frankly neither are good for the American economy. Today, the Fed has three options:

1. Prematurely end the rate cutting cycle due to high inflation, start an unwanted hiking cycle possibly triggering a recession (which will instantly trigger a new cutting cycle)
2. Hike inside a cutting cycle once, abandoning whatever rhyme or reason they followed with little to no beneficial effect on the economy itself but to maintain the Fed’s “credibility”
3. Do nothing – “look through” current record fuel prices, cross their fingers and hope nothing gets worse

So what’s going to happen? Nobody knows, but investors anticipate another 25bps rate hike before the end of the year.

Rates are coming down from 5% hard. The last time this happened was in 2006-2007, which arguably triggered the Great Financial Crisis. Long-time readers will remember that gold went on a run from there that had it tripling in price.

Today? Well, the price of gold has already tripled. Over the past few years, we have gold rise alongside a “strong” dollar. We have seen gold abandon its correlation to most traditional and alternative assets, and gain even when history would demand the opposite.

And we have seen it post its biggest gain on the tail end of the harshest rate hiking cycle in 50 years, one from which rates still have to come way, way down.

Last week, I was dissatisfied over how rabid sentiment and Fed hints are swaying gold price unjustly.

Today, I’m wondering if that’s the case. The Fed is conducting an unprecedented monetary experiment while gold price has bobbed, now steadily holding to a very lofty $4,300.

This is the innate problem with gold news. The oldest and most battle-tested form of money only cares so little about day-to-day affairs.

But since gold investors deserve coverage with clarity, I must soldier on – and take my lumps when I make a bad call.

Goldman Sachs doubles down on 2026 $5,400 gold price forecast

Goldman Sachs’ analyst Lina Thomas is giving us a preview of what major banks expect from gold after the hike, and it seems to be bullish action.

Again, last week I complained how gold is being pushed down by a fake headwind in the form of an interest rate hike.

The headwind materialized as not fake in that the Fed hiked interest rates. But it seems it wasn’t much of a headwind after all. Thomas says Goldman sees an additional hike before year-end and then a return to cutting rates by September 2027.

As I said before, uncharted territory, but one that gold should be able to navigate well, as Goldman expects the metal to gain another $1,000 in this timeframe.

This might be one of the more interesting reports I have come as of late, for a number of reasons.

First, there are two common bits of knowledge in the gold market.

First is that gold does badly in hiking cycles, because they are fundamentally against it, strengthening the dollar and the prospects of holding it.

Second is that the first bit of knowledge is wrong. Over the last two decades, gold has posted gains in nearly all of the hiking cycles.

Don’t ask me why we have the first bit then: I don’t know. That’s just what market participants like to repeat.

My favorite part of Thomas’ report is that it falls squarely in line with my ideas of a protracted run in gold. When it became clear that the Fed is going to play the waiting game due to high inflation, banks downgraded their gold forecasts from $6,000-$6,500 closer to $5,000.

Tighter money, stronger dollar was the idea.

As I argued on and on, why would any precious metals investors watch 5x gains in five years and then worry about a correction? Instead of gaining 3x and hold that over an entire decade?

Because when that decade wraps up, questions will be asked. How low can gold go from here? Should it really, after being up for so long? Might we now start yet another run?

Thomas’ target is still conservative both when we take into account those $6,000-$6,500 forecasts, and State Street recently saying that $10,000 is a matter of when, not if.

Another reason why I like Goldman’s bit is that banks might finally be recognizing that for all the talk of inverse correlations and higher interest rates’ effects on gold’s price, none of it actually holds water.

Gold, now more than ever, is doing its thing irrespective of circumstances that are supposed to sink it. I’m guessing that the “why” as to this is intrinsically tied to the rotten state of money and most asset classes, along with the hot-air-balloon global economy in which we seem to be inflating the most.

Again harkening back to my previous point, only a few things have truly made a difference to gold investors: When they bought gold, how much they were able to afford, and whether they could resist the urge to sell when they thought they saw a peak in price. It’s not about timing the market, it’s about time in the market. I don’t believe gold or silver are about cashing in quick profits – I believe they’re for long-term financial protection.

Inflation comes for Oktoberfest

For years now, Liechtenstein-based Incrementum AG has maintained a gold/Oktoberfest beer ratio.

Readers will know that I am a pretty big proponent of paying attention to the gold/silver ratio, as it never fails to provide insights into the real price of both assets. Depending on how much silver interests you versus beer, the gold/beer ratio, as I’ll call it, might be even more relevant.

Yes, it’s a silly name! But that hides an in-depth analysis that is anything but silly – part of Incrementum’s broader, expansive In Gold We Trust report.

As you might guess, they measure how much Maß (mass) of beer you could get during Oktoberfest in a given year per ounce of gold. Frankly, I wasn’t aware that Oktoberfest served beer by weight rather than by volume… Why not pints or liters or gallons? It’s Europe, they do everything differently there.

As they note, the 191st Oktoberfest comes with a record 240 ratio, or 1 ounce of gold = 240 Maß of delicious refreshing Oktoberfest beer. This number surpasses the highest ratio on record previously (227, set way back in 1980).

However, this is no mere inflation gauge. Gold/beer has been on a downtrend in beer’s favor for most of the period since 1950. The spike in 1980 was abrupt, followed by a steep decline.

The spike in 2012… again, familiar years… was less abrupt, and the ratio lingered higher ever since.

For the third time we see familiar years, as the ratio only moved from 56 to 63 between 1996-2006, when we still had some semblance of an economy.

It never went below 90 after 2010, and is now precipitously spiking, having doubled since 2022.

Incrementum notes:

“To put a stop to the price spiral of recent years, proposals were made to charge an admission fee for Oktoberfest.”

Like I said, a dark joke reflecting on a bleak reality. Everything is getting more expensive, far above what the annual inflation rate would suggest.

Gold investors can afford to watch, while savers who rely on cash watch their purchasing power evaporate – like the bubbles in a pint of pilsner left sitting for too long.