London 28/03/2012 - Goldman Sachs said on Wednesday it expects gold to continue to glitter as subdued US economic growth this year will be supportive, keeping its 12-month forecast at $1,940 per ounce.

In a report the bank said US real interest rates are the primary driver of dollar-denominated gold prices. However, after being remarkably strong in the first half of 2011, this relationship subsequently broke down, with prices falling sharply in the face of declining US real rates.

"With gold prices expected to continue to climb through 2012, we find hedging opportunities less attractive for gold producers at this time,” the company, said.

“Gold prices have returned to trading with a strong inverse correlation to US real rates since late December, at sub $1,700/oz they remain below the level implied by the current 10-year TIPS yield of -15 basis points.”   

Goldman Sach expects subdued growth and further easing by the Fed in 2012, which should push the market’s expectations of real rates back down to near zero and gold prices back to the 6-month forecast of $1,840/oz.

“The disconnect between gold prices and real rates last fall was likely exacerbated by the scramble for US dollar liquidity by European banks which reportedly led them to use the gold market as a source of US dollar liquidity,” it said.

Despite declining expectations for QE3, as reflected by the decline in gold prices earlier in March, another asset purchase programme is likely to be announced in the second quarter.

“We reiterate our view that at current price levels gold remains a compelling trade but not a long-term investment," the bank, said.

(Editing by Martin Hayes)

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