Goldman Sachs Says Gold is Going Lower

After a week that saw gold fall more than six percent in a single day, a little bit of good news would go a long way. But gold bulls (or bugs) aren’t going to get it from Goldman Sachs GS. In a research note Monday, the company lowered its short and medium term forecast for the precious medal.

Last week, gold shed about 6.6 percent making its total drop in 2013 about 23 percent. Who could forget that 13 percent drop over the course of a couple of trading sessions in April only to see gold recover about half of those losses only to retreat lower, setting new lows last week. Will thing happen again?

Goldman Sachs, in a research note Monday morning, said that it believes gold will finish 2013 at $1,300 per troy ounce—within $4 of current levels but 9.4 percent lower than its previous forecast. It sees 2014 as another painful year with gold finishing at $1,050, 17.3 percent lower than its previous forecast. This is the fourth time the bank has revised down its gold prices since December.

In the note, Goldman said, "Medium term, we expect that gold prices will decline further given our U.S. economists' forecast for improving economic activity and a less accommodative monetary policy stance. Further, with quantitative easing tapering likely to start soon, perhaps even a bit sooner than previously anticipated, we are fast forwarding on our real rate path."

The report suggests that gold has tracked U.S. real rates, interest rates adjusted to remove he effects of inflation.

“Importantly, this latest move has tracked the sharp decline in US real rates triggered by the re-pricing of Fed easing policies, in stark contrast to the April sell-off which had occurred with range-bound US real rates. In fact, our modeling suggests that the decline in gold prices since early May is consistent with both the higher level of US real rates as well as the steady ETF outflow (our $1,270/toz end-2014 price target reflected US real rates at 0.5%, their current level).”

In the medium term, further Fed action and an improving economy might push the 10-year TIPS to one percent by the end of 2014—up from its previous forecast of 0.5 percent. This, along with decreasing holdings by gold ETFs, should send gold lower next year.

While that will likely fuel buying in the jewelry and coin markets, it’s not likely to have a large-scale effect on prices.

Not everybody has such a dreary forecast. Sean Hyman, a CNBC guest Monday morning, said that gold may have higher near term prospects as it reassumes its role as a flight to safety.

Disclosure: At the time of this writing, Tim Parker had no position in gold through any investment type.