Improving US growth outlook offsets further Fed easing
Our economists forecast that the US economic recovery will slow early in 2013 before reaccelerating in the second half. They also expect additional expansion of the Fed’s balance sheet. Near term, the combination of more easing and weaker growth should prove supportive to gold prices. Medium term however, the gold outlook is caught between the opposing forces of more Fed easing and a gradual increase in US real rates on better US economic growth. Our expanded modeling suggests that the improving US growth outlook will outweigh further Fed balance sheet expansion and that the cycle in gold prices will likely turn in 2013. Risks to our growth outlook remain elevated however, especially given the uncertainty around the fiscal cliff, making calling the peak in gold prices a difficult exercise.
Gold cycle likely to turn in 2013; lowering gold price forecasts
We lower our 3-, 6- and 12-mo gold price forecasts to $1,825/toz, $1,805/toz and $1,800/toz and introduce a $1,750/toz 2014 forecast. While we see potential for higher gold prices in early 2013, we see growing downside risks.
Goldman’s model boils down to this chart, that posits that gold prices are supported by a low real interest rate environment:
Goldman’s forecast is based on the idea that real rates will rise due to stronger economic growth in the second half of 2013 and beyond.
But the notion of strengthening economic growth in the second half of 2013 and beyond is deeply problematic. The total debt to GDP ratio is still above 350%, far, far far above the historical norm and a huge burden on the economy. The service costs of all that debt (sustained only by Fed liquidity helicopters — without the bailouts and liquidity lines, the unsustainable debt would have all been liquidated in 2008) is keeping the economy (and thus, real interest rates) depressed.
This means that the supposed recovery — and any such attendant dip in gold prices — is extremely unlikely to materialise.
In fact with Goldman’s track record of giving bogus advice to clients and then betting against it, this call could very easily signal that we are on the edge of another seismic upswing in the gold price.
US mint data shows gold demand is strengthening:
In 1998, Ashanti Gold was the 3rd largest Gold Mining company in the world. The first “black” company on the London Stock Exchange, Ashanti had just purchased the Geita mine in Tanzania, positioning Ashanti to become even larger. But in May 1999, the Treasury of the United Kingdom decided to sell off 415 tons of its gold reserves. With all that gold flooding the world market, the price of gold began to decline. By August 1999, the price of gold had fallen to $252/ounce, the lowest it had been in 20 years.
Ashanti turned to its Financial Advisors – Goldman Sachs – for advice. Goldman Sachs recommended that Ashanti purchase enormous hedge contracts – “bets” on the price of gold. Simplifying this somewhat, it was similar to when a homeowner ‘locks in’ a price for heating oil months in advance. Goldman recommended that Ashanti enter agreements to sell gold at a ‘locked-in’ price, and suggested that the price of gold would continue to fall.
But Goldman was more than just Ashanti’s advisors. They were also sellers of these Hedge contracts, and stood to make money simply by selling them. And they were also world-wide sellers of Gold itself.
In September 1999 (one month later), 15 European Banks with whom Goldman had professional relationships made a unanimous surprise announcement that all 15 would stop selling gold on world markets for 5 years. The announcement immediately drove up gold prices to $307/ounce, and by October 6, it had risen to $362/ounce.
Goldman pocketed a shitload of money; clients ended up getting socked in the mouth.
Goldman publicly turning bearish, may be a pretty bullish sign for gold.