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LAWRIE WILLIAMS: Goldman could be caught short on gold

The most recent call by Goldman Sachs to once again sell gold short has not, so far been a good move by the investment bank, and it comments in its latest research that it is down 5% on the call – with a stop loss indicated at 7%.  But, it also reiterates that it remains confident in its bearish viewpoint and that it still stands by its near-term gold price target of $1100 per ounce and longer term target of $1000.

Of course the big anomaly here is that Goldman and its followers between them have the financial clout to go a long way towards pushing the price back downwards in these days when the western gold price is still largely set on the COMEX paper gold futures market.  What has perhaps been surprising is how strongly gold has actually performed since Goldman issued its sell short call.  Other investors, rather than following the Goldman lead, have been buying – as witness the big rises in the gold ETFs, which represent the easy route into what is effectively physical gold investment.  OK it’s another type of paper gold, but is at least fully backed by purchases of the physical stuff. (There will always be doubters that this is actually the case, but if not it would represent a fraud on an absolutely unprecedented scale.)

But things are beginning to change in the physical gold market.  The benchmark gold price is set twice a day in London, but this in turn tends to be led by the COMEX spot price which, as we noted above, is largely defined by the paper gold market.  This seems to bear less and less direct relationship to the real availability of physical gold.  Western inventories of available gold are being run down to what might be considered dangerously low levels as gold moves from bank vaults in New York and London, and other repositories, indirectly to Asia (much via the Swiss refineries) where it tends to be much more strongly held.

Next month, the Shanghai Gold Exchange is due to launch its own gold price benchmarking system (in Chinese yuan), which could further dilute the western bullion bank influence on price setting.  Can the bullion banks control the price of physical gold any longer once this begins to take a hold on Asian gold trade?  Perhaps the Chinese will try and use this to manipulate the gold price to their own agenda (which we see as likely) whatever this agenda may prove to be.  Perhaps keeping the price down as it continues to build its own state hoard, or seeing it rise to keep the big gold-buying middle class on side.

Jeff Christian of CPM Group of New York, who has been one of the most accurate predictors of gold price trends over the past couple of years, suggested in an interview on the fringe of this week’s PDAC Convention in Toronto, that he felt that the Goldman analysts were somewhat out of touch with the fundamentals of the gold market, thus implying that their call was wrong.  However he did also comment that the recent gold price surge was not sustainable in the short to medium term and would pull back in the second and third quarters, before making a sustainable recovery towards the year end.  What level it pulls back from he did not predict so even on his scenario, if gold price rises continue for the next week or two - and it hit $1276 on Asian markets last night before the European market (maybe helped by Goldman?) brought it back down to the $1260s this morning), Goldman could yet find itself caught short.

11 Mar 2016 | Categories: Gold

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