Why The Coming Few Years Could See A Brutal ... - Business Insider

Earlier this week, Goldman Sachs came out with a note that said by 2018, gold would likely fall to $1200.

A lot of people chuckled at the idea of a 2018 outlook, as they wondered what, exactly was the point of such a call.

Indeed, anyone holding gold right now might be more interested in a note from the bank that came out later in the week which said gold might spike in the coming weeks, thanks to debt ceiling/fiscal cliff fears.

But for those interested in the actual dynamics of how gold behaves, the 2018 call was actually extremely important.

Goldman's key line in its analysis was: "Assuming a linear increase in US real rates back to 2.0% by 2018, as proxied by the 10-year US TIPS yield, we expect that gold prices will continue to trend lower over the coming five years and introduce our long-term gold price of $1,200/oz from 2018 forward."

As Eddy Elfenbein has done a great job showing, the primary driver of gold is low real interest rates. When real interest rates are very low or negative (as they have been in the US) gold rises. When the opposite is true, gold falls.

Now, finally, people are talking about the eventual return to rate normalization, and an increase in real interest rates in the US. The US economy isn't totally out of the woods, but it's looking more normal all the time. And that normalization has the potential to be bad news.

Source: http://www.businessinsider.com/why-the-coming-few-years-could-see-a-brutal-turnaround-for-gold-2013-1

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