Goldman Sachs sees a big upside in gold raising its target price to $2,500 an ounce by the end of the year. The investment bank cites recession worries and persistent inflation as reasons to be bullish on gold.

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Hovering around $1,825 an ounce, gold currently sits very near the 52-week moving average.  Gold certainly hasn’t excited investors in recent months, but it has been much less volatile than other assets. As MoneyWeek put it, “For all the declines we’ve seen elsewhere in stocks, bonds and crypto, and the ensuing erosion of wealth, gold sits at its one-year average. In other words, it’s done what it’s supposed to: preserved its value, and preserved your capital.”

It’s also important to note that gold has held its own despite a very strong US dollar.

The Goldman Sachs report said the risk of inflation will likely influence the price of gold through the latter half of the year. The investment bank warned that inflation expectations could become “unhinged.”

As Kitco news summarized the Goldman report, “In any scenario where inflation increases rapidly and sustainably, gold will likely outperform other assets. The report said 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.”

Geopolitical factors, including the ongoing war between Russia and Ukraine, could also lower investor risk sentiment. This would boost gold’s appeal as a safe-haven asset.

Rising bond yields and Federal Reserve rate hikes to battle inflation have created some headwinds for gold. But an analysis by the World Gold Council shows that real rates below 2.5% haven’t historically hurt gold’s performance. Real rates remain deeply negative and it is unlikely the Fed will be able to push rates to that key level.

The market perception has been that the Fed will be able to tighten monetary policy enough to tackle inflation while bringing the economy to a “soft landing.” In reality, the inflation solutions are worse than the problem. We believe a more likely scenario is that the Fed will raise rates enough to pop the bubbles and crash the economy. This could cause a pause in rising prices, but the central bank will likely pivot back to rate cuts and quantitative easing. That would mean elevated inflationary pressures over the longer term.