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LAWRIE WILLIAMS: Goldman says short gold – again. Price plunges then recovers.

When analysts at such a heavy hitter in the investment banking world as Goldman Sachs say sell gold short, and the price subsequently plunges, is that because the analysts are particularly prescient, or is it a case of cause and effect?  This has just happened – again.  In a report out on Feb 15th – Monday this week – the Goldman Sachs precious metals analytical team did just that with the expressed view that the fear factor, which had been driving the gold price upwards strongly over the past couple of weeks, had been overdone and that the U.S. Fed would be undeterred in raising interest rates.  Now whether Goldman just got the timing right, or whether it was because of the content of the report, the gold price plunged, equities soared in the Far East in particular (the Nikkei up by the highest daily increase in years, and western markets followed suit).

Goldman’s view is that the recent gold price recovery has been hugely overdone and that the metal price will fall back to $1,100 by mid-year and to $1,000 within 12 months.  One has to say the Goldman analysts have been pretty consistent in their views on gold – and largely correct in their forecasts over the past few years, but the question has to be asked whether this, in effect, is accurate forecasting, coincidence or effective manipulation of the markets in the sense that Goldman Sachs has such a strong reputation in the investment banking sector that institutional investors in particular follow the bank’s recommendations to such a strong intent that the opinions actually move the markets.

It may be coincidence too that the specific sell gold short recommendations seem to coincide with sharp upwards moves in the gold price which, if not halted in their tracks, might make Goldman’s forecasters look hugely inaccurate.

This time around, gold had risen by over $100 at one time in just a week - a fairly spectacular rise by any standards.  In some respects it could be considered that gold had risen too far too fast anyway as we said in a prior article (See: The gold bulls still have the advantage - at least for now) so timing a price fall call on this basis may have made sense in any case, but a specific recommendation to sell the metal short, rather than just a prediction that prices might fall back from their peak, puts a rather different emphasis on a price fall forecast.

But, after yesterday’s big price fall, which continued overnight as Asian markets seemed to have no wish to drive gold back up again, European markets had no such qualms and  at the time of writing spot gold had pulled back to over $1,215 – from an interim low of a little over $1,190.  For any kind of gold upwards momentum to be maintained it probably needs to stay above $1,200, but it may well come under pressure again when U.S. markets open later today following yesterday’s holiday.

We still think that gold has some positive fundamentals – and certainly some of the big mainstream analytical consultancies like Metals Focus and GFMS are looking for a price pick-up in the second half of the year when new mined gold production is seen as falling – at last – while Eastern demand is seen as remaining high and, in our assessment, Western physical gold stocks are being depleted.  Goldman in its forecasts seems to be suggesting that the U.S. Fed will continue with perhaps three more interest rate rises this year, which many other analysts now doubt, and maybe they are right, but then gold confounded analyst predictions that an initial Fed rate rise would hit the price hard when the first rate rise was announced in December.  In the event it was general equities which seemed to suffer most and gold rose!  Equities may have made a big recovery yesterday and even the Shanghai Composite Index was up a little today, but European markets today have opened uncertainly, perhaps waiting for a lead from Wall Street.

ETF purchases or sales are the other area which gives a good guide to the progress or otherwise of the gold price.  So far this year we have seen strong net purchases, but as we saw last year this trend can reverse quite quickly if the mood turns against gold again and equities come back into more favour.  We think the whole financial sector is poised on the edge and could move either way, with institutions like the U.S. Fed doing their best to prop up markets and maintain confidence in the light of some overall economic statistics which suggest the opposite.  It’s something of a battle for investment hearts and minds.  In this context the Fed may well try and maintain the view that it will continue to raise interest rates (even if it doesn’t actually do so) to try and maintain some degree of confidence in its capability of being able control the direction of the U.S. economy, however unjustified in reality.

16 Feb 2016 | Categories: Gold

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