The new year is already off to a running start. Fiscal cliff negotiations are behind us, although important deficit-cutting talks are still to be conducted. Markets abhor uncertainty, but with the fiscal cliff reduced to a mere bump, markets have rebounded from the pessimism that had persisted at the end of 2012. The S&P 500 index is over 1,500, and it looks like another January rally is underway. But all is not perfect in this imperfect world. Goldman Sachs just predicted that Gold prices would fall from $1,650-ish down to $1,200/ounce by 2018.

In a written communication to clients, a group of Goldman analysts, including Christian Lelong, Max Layton, Damien Courvalin, Jeffrey Currie, and Roger Yuan, wrote, “Assuming a linear increase in US real rates back to 2.0% by 2018, as proxied by the 10-year US TIPS yield, we expect that gold prices will continue to trend lower over the coming five years and introduce our long-term gold price of $1,200/oz from 2018 forward.”

Oops! Does that mean every Goldbug out there should sell his Gold positions? That kind of hysteria would surely drop the bottom out of the Gold market, but what would it mean for the U.S. Dollar? The greenback has a history of acting inversely to whatever Gold chooses to do in the market. Occasionally, the two are “dance partners” for a brief period until this old investor maxim resumes. Goldman is pinning their guess on an improving U.S. economy, driven by improvement in real interest rate valuations. Under this scenario, the U.S. Dollar would surely strengthen relative to its peers.

Here is their more detailed explanation, “Beyond real interest rates, fluctuations in the monetary demand for gold also exert an influence on gold prices. Our forecast currently embeds physical gold demand from ETFs and central banks growing in 2013 at the 2009-2012 pace, with ETF purchases slowing in 2014. In our forecast, this steady monetary gold demand helps slow the decline in prices over the coming years. Given the risk around this assumption, we also considered alternative paths for physical gold demand but found that, while not negligible, the impact of gold prices to stronger or weaker monetary demand for gold remains modest compared to the influence exerted by real rates and the Fed’s QE. As a result, it would require a significant further increase in monetary demand for gold to change our outlook for gold prices.”

Did anyone understand that argument? Goldman also predicted that the S&P 500 index would end the year at 1,250, when it reached roughly 1,500. If making a 20% error over one year is any indication of their estimation prowess, then what do we make of their Gold prediction now?

There are fundamental reasons why demand for Gold may decline over 2013, but these have more to do with consumption-type taxes that China and India are assessing on import purchases of the shiny metal. Officials in these two countries are attempting to curb the appetites of their burgeoning middle classes to protect precious foreign exchange reserves on hand, but these impacts would only be temporary. Experts in the Gold market are presently mixed, but many believe that there is actually pent-up demand that must first be vented over the coming year.

There are Gold bears, as well, that have been predicting that Gold is overvalued, but they have been making this claim for years. Sooner or later, they may be right. Most experts believe Gold prospects are modest, but Goldman analysts want bragging rights in case doom and gloom does occur. Stay tuned!

This has been a special report by Forextraders.com