Gold Prices Expected to Reach Record Highs Amidst Conflict and Fiscal Concerns

Gold prices are expected to reach record highs according to Goldman Sachs' Tony Kim. Kim attributes this expectation to two main factors: the nomination and confirmation of Jerome Powell as the new Fed chair, and the conflict between the US and Iran.

The energy market disruption caused by the conflict has had a significant impact on the global economy, particularly in emerging economies such as India, where the need to defend the currency against inflation has reduced demand for gold. However, Kim notes that central banks have been accumulating physical gold at an increasing rate, with purchases rising from 400-500 tons per year to over 1,000 tons per year.

This long-term accumulation of physical gold has led to a decrease in the amount available for other purposes such as jewelry and investment. As a result, Kim believes that it will not take much investment capital to drive prices materially higher. He also notes that official policy interventions have contributed to the demand for gold, citing the US Treasury's repurchasing of long-end bonds.

The relationship between gold and real interest rates has held up in the short term, but Kim expects this correlation to break down as fiscal sustainability becomes a growing concern globally. He believes that higher backend bond yields due to concerns about fiscal situations could lead to allocations going into gold.