Goldman Sachs Forecasts $1,650 Gold in 12 Months

"Prospects for QE and falling long-term interest rates raise forecast."

Goldman Sachs has raised its 12-month forecast for gold to $1,650 an ounce, citing expectations for further quantitative easing in the U.S. and prospects for long-term interest rates to continue falling.

Goldman said the decline in U.S. real interest rates is likely to persist, and rates could push even lower in the near term should the Federal Reserve undertake quantitative easing measures. Thus, Goldman said it is raising its gold price forecasts to $1,400, $1,525 and $1,650 on a 3-, 6- and 12-month horizon. Goldman said its updated forecasts point to an average of $1,575 an ounce in 2011, which is $175 higher than it previously expected.

"The return to quantitative easing will likely be a strong catalyst to drive gold prices higher, and we expect the gold price rally to continue until U.S. monetary policy begins to tighten," Goldman said.

The bank's economics team expects the Fed to return to quantitative easing with purchases of U.S. Treasury securities of $1 trillion, which in turn should keep U.S. bond yields depressed. Furthermore, the bank said it expects the announcement at the Federal Open Market Committee's Nov. 2-3 meeting.

However, while Goldman said gold could rally for an "extended period," it also sees a "considerable downside risk" in the longer term, should the Fed eventually tighten monetary policy earlier than expected.

For now, Goldman said, its U.S. economists suggest that it could take until 2015 or longer before a rate hike becomes "appropriate," although they emphasize this is not a "formal forecast."

"While they do not expect tightening to happen before 2012 at the earliest, we view an earlier-than-expected tightening of U.S. monetary policy as the primary downside risk to our gold price forecasts," Goldman said.

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