Goldman Sachs has recently raised its year-end 2022, gold price target to $2500/oz, signaling a strong 2022 after gold prices ended 2021 down approximately 4%. Last year’s strong economic recovery and growth created conditions for the decline in gold, as investors moved to riskier assets. However, the coming year could bring increased concerns of a US recession, which would lead to higher gold prices.
While some investors are concerned about the potential for inflationary pressures in the wake of unprecedented levels of government stimulus spending, Goldman argues that these fears are overblown, and that inflation will remain contained.
Other global risks including the Russian invasion of Ukraine may play a hand in a lower risk appetite in the markets. Analysts and economists have also started to sound the alarm on a deceleration in U.S. growth. This could lead to a perfect storm that propels gold prices much higher in the months ahead alongside falling valuations for equities.
One industry that may remain immune to many of the negative shifts playing out is the gold mining industry. Not only do gold mining companies benefit from higher gold prices, but they are also able to hedge their production at very attractive levels, meaning that they will still be able to generate healthy profits even if gold prices were to fall. This makes gold mining stocks an attractive option for investors looking to profit from a potential gold price rally.
Exploration companies also present new opportunities for investors to gain from a rise in gold prices. While small-cap stocks and explorers often see the effects of a boost from gold prices later than major producers, the effect is often significant. One of those companies, Collective Mining (TSXV:CNL), has shown that strong recent news and the right conditions in the gold market can push a stock higher.
The stock is up 28% in the past six months from October 26, 2021, to April 25, 2022. Collective recently announced it had intercepted a broad zone of mineralization at a new maiden drill hole at the Apollo target at the Guayabales project in Colombia. This is part of a minimum 20,000-metre drill program for 2022, with four rigs currently operating at Gauayabales. The company is expected to release further news and assay results in the coming months, at the same time that gold prices are expected to creep higher by Goldman Sachs analysts.
Goldman Sachs has long been bullish on gold, and this latest price target increase is yet another sign that the investment bank sees strong upside potential for the precious metal. The bank also believes that the risk of inflation is a likely strong factor to influence gold prices this year. Goldman has said that inflation expectations may become “unhinged”, as inflation has become quite persistent, and has proven not to be transitory as previously expected by the Fed.
In any scenario where inflation increases rapidly and sustainably, gold will likely outperform other assets. This is due to the fact that gold is a physical asset with no liabilities, and therefore its value cannot be eroded by inflation like other assets such as bonds and equities.
2022 may also see a bump in gold-related and gold-adjacent equities like gold mining stocks and ETFs. These are both vehicles that will likely rise in value alongside the precious metal, as investors seek to gain exposure to gold’s upside potential.
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