Unlike last August, gold has become a fear trade. See the relation to the VIX below. GS maintain their view of rising U.S. rates and hence lower gold prices. It all depends on whether you buy into systemic fears or not. Personally as I said last week I wish Banro would employ partial hedging to take advantage of spikes in the gold price.
Goldman Tells Clients To Short Gold 5 Days After Saying Gold May Soar "Much Higher Over Time"
What a difference five days makes.
Recall last Wednesday evening, when none other than Goldman decided to be the latest to piggyback on gold's torrid momentum, by saing "there’s scope for the gold price to extend much higher over time." This is what Goldman's chartists predicted:
The current area includes the 100-wma and the trend across the highs since March ’14 (wedge resistance). It’s formed an exhaustive looking candlestick pattern and oscillators seems to be turning. Basically, it seems a good place to start a corrective pullback. The 100-wma in particular was an important pivot in determining the start of the late-’12 decline.
From a wave count perspective, the market is likely in the initial stages of a counter-trend ABC correction which could eventually retrace ~38.2% of the 5-waves from ’11 to 1,381. From a pure techs perspective, breaking from a declining wedge would initiate a medium-term target back at the start of the pattern ~1,392.
Bottom line, although 1,200-1,202 might hold in the near-term, there’s scope to extend much higher over time. Initially, this troulbed us because whenever Goldman tells clients to do one thing, the firm is doing precisely the opposite. After all, this is the firm whose Top 5 of 6 trade recommendations for 2016 were stopped out at a loss for anyone who followed them 6 weeks into 2016 as we wrote in "Goldman Capitulates: Closes Out 5 Of Its 6 Top Trades For 2016 With A Loss."
How happy, then, we were, if very much unsurprised that less than a week later, as the gold momentum has been briefly snapped, that Goldman's head of commodities has decided to take the other side of Goldman's technical trade, and is now advising Goldman's repeatedly crucified muppets, pardon, clients to short gold. Just moments ago, this is what Goldman's head of commodities said:
As we maintain our view of rising US rates and hence lower gold prices with a 3-month target of $1100/toz and 12-month target of $1000/toz, we are recommending shorting gold through a GSCI-style rolling index. Ironically, gold has a negative yield and such a short would create a positive carry in a world concerned about negative interest rates that made gold rise in the first place. While we acknowledge that fears around systemic risks can push prices higher in the near term, we see such risks not offsetting the potential gain given how extreme pricing has become and the heavy data reporting period in coming weeks that will likely show that the while economic growth has slowed, it is not collapsing to the point to justify such extreme pricing across assets. So "not collapsing" is the new "green shoots"? Got it. And then this:
We believe that the sharp rise in gold prices this past week was mostly due to concerns over systemic risks, particularly in the banking sector, given the sharp correlation of gold prices with bank stocks and other measures of systemic credit risks. While this is a continuation of a trend established since the beginning of the year that started with systemic concerns over oil and China, we believe that these new fears like the past fears are not justified. As our banks team argues, European banks, which are at the center of concerns over negative interest rates, can fund from the emergency funding facilities put in place in 2012 (the TLTRO remains barely used), money markets are open with no evidence of strain in either euro or dollar funding, while deposit growth is further adding to liquidity. All of this against a backdrop of higher capitalization aided by deleveraging suggests that a crisis re-run is unlikely. That's funny: remember the last time Goldman was very bullish on banks? It was in November, when going long big US banks was Top Trade #5 of Goldman's 6 trades for 2016. This is what happened there:
Close long large cap US banks through the BKX Index relative to the S&P500 on 11 January 2016, opened on 19 November 2015 at 100, with a potential loss of 5.4%. Don't worry though, this time Goldman will get it right, promise.
Sarcasm aside, what is more important is that Goldman is now telling its clients to short gold through Goldman. Translation: after a brief period in which Goldman was actually shorting gold when it was telling it clients to buy it, the firm which controls every central banks is once again actively buying every golden ounce, in paper or physical format, its clients have to sell.
Finally, we can't help but muse how right JPM's Marko Kolanovic was once again when just last week the JPM quant said to buy gold with the following amusing comment describing his clueless peers:
The second argument was that of Momentum: “if an asset was going down, it will keep on going down,” We have concluded that many of our competitors rely on momentum in their commodity forecasts (e.g., when oil is $150, they forecast $200; when it is $30, they forecast teens). This type of trend following can always be rationalized (e.g., oil will go down because it is very difficult to store it – so it has to be sold; and Metals will go down because it is very easy to store them – so production will not slow down). While a simple momentum prescription does work most of the time, the key is to assess the likelihood of market turning points during which one can lose years of profits in a matter of days (less painful for a sell-side analyst and more for an investor). But it works miracles for a sell-side analyst, like Goldman for examples, who also happens to be a prop investor taking the other side of the trade its own analysts recommend.
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