Goldman Sachs and Citigroup collectively bet on the "golden-haired girl"! The real risk of gold has emerged

When top Wall Street investment banks frequently mention the "Goldilocks" market, the luster of gold seems to be gradually fading.

Following Goldman Sachs, Citigroup wrote in its latest research report that the current market is exhibiting typical "Goldilocks" characteristics—risk appetite is warming up, with strong performances in stocks, credit, and technology sectors, while the bond market is relatively subdued. The bank believes that in a "Goldilocks" market environment, gold typically performs poorly, while technology stocks and growth stocks are the main beneficiaries.

"Goldilocks" refers to an ideal macro environment with moderate economic growth and mild inflation.

Citigroup Warns: Gold Loses Luster in "Goldilocks"

According to Citigroup's analysis, the "Goldilocks" environment with suppressed inflation means that gold loses its safe-haven appeal and performs poorly. At the same time, the economic growth environment may push up real yields and term premiums, increasing the holding costs of gold. Additionally, data shows that during historical "Goldilocks" periods, gold's risk-return ratio (Sharpe ratio) significantly turns negative.

Another severe issue is market positioning, as gold has become a "consensus long trade" for asset allocators. According to Citigroup data, asset allocators still maintain a consensus trade on precious metals (albeit reduced). The CFTC-managed funds' 3-year Z-score shows that gold is above the median, while silver scores the highest within the covered range.

Citigroup warns that in the current consensus bullish context for precious metals, traditional safe-haven assets like gold may be more vulnerable in such an environment. The Citigroup commodities strategy team has therefore downgraded its gold rating, believing that "the market supply-demand gap is about to peak, and growth risks are fading."

In contrast, technology stocks and growth stocks are expected to continue benefiting. Citigroup data shows that in a Goldilocks environment, the technology and communication services sectors perform the best, while defensive sectors such as consumer staples, utilities, and healthcare perform poorly.

The report notes that stock factor returns also align with Goldilocks characteristics, with growth and momentum factors outperforming value and low beta factors. Forex arbitrage trading and commodity quantitative strategies also tend to perform well in a Goldilocks environment.

However, the report also mentions that the current market is not entirely in a "Goldilocks" state, leaning more towards a "normal" state (Normal Regime): economic growth is slightly above trend levels, and inflation is slightly below trend The real "Goldilocks" requires more extreme conditions: inflation needs to be one standard deviation below the 10-year average, while growth must exceed 1.4 standard deviations. Although the conditions have not been fully met, current asset performance has shown "Goldilocks" characteristics: technology stocks are leading strongly, credit assets are in demand, but fixed income performance is struggling.

AI Productivity Revolution Drives Structural Change

According to Citigroup analysis, AI technology has the potential to become an important structural driver of productivity, enhancing economic growth without raising inflation. The report shows that historical "Goldilocks" periods are often accompanied by productivity increases, including the mid-1980s and the late 1990s internet boom.

The Citigroup global economic team's model research found that if AI can automate routine tasks, it may achieve higher output per worker and lower operating costs across industries, thereby supporting higher output growth. The report points out that "Goldilocks" periods typically support higher real yields, stock valuations, and improved fiscal conditions.

According to Citigroup data, the S&P 500 index is currently at the 75th percentile of "Goldilocks" valuations, but this remains within a high range. Real yields are below the median, and term premiums are also low, indicating that there may be more steepening of the yield curve.

Despite the optimistic long-term outlook, Citigroup also reminds investors to pay attention to short-term cyclical risks. The report notes that the weak U.S. labor market and tariff uncertainties still require cautious handling. Citigroup's U.S. economic team expects that the weak labor market may lead the Federal Reserve to start cutting interest rates from September. Citigroup predicts that U.S. GDP growth will drop to 0.2% (year-on-year) in the third quarter, then accelerate to 1.1% in the fourth quarter.

Goldman Sachs Also Optimistic About "Goldilocks" Prospects

Goldman Sachs also emphasized the resurgence of the "Goldilocks" market in its latest research report.

An earlier article by Wall Street Insight mentioned that Goldman Sachs believes the enhanced dovish expectations from the Federal Reserve, the cooling of geopolitical risks, and progress in trade negotiations have collectively created a "Goldilocks" macro backdrop—neither overheating the economy nor having high inflation. Currently, the market is more focused on the benefits brought by easing expectations, which has driven a rebound in risk appetite.

Goldman Sachs stated in a research report on Monday that there has been a significant positive change in the market environment, driven by three core factors:

• Enhanced dovish expectations from the Federal Reserve: Market expectations for the Fed's dovish stance have significantly increased. Goldman Sachs economists have brought forward their prediction for the next rate cut to September and lowered their final rate forecast to a range of 3-3.25%

• Geopolitical risk cooling: The easing of tensions in the Middle East has reduced the geopolitical risk premium in the market.

• Progress in trade negotiations: Positive developments in U.S. trade negotiations, including the cancellation of the "section 899" clause, have provided support for growth prospects