October 22, 2015
When it comes to assets, economists, Wall Street, and central planners love them all… except one: gold. Forget about Bernanke’s hilarious sworn testimony that gold has “value only due to tradition”, and recall Mario Draghi’s QE announcement in December 2014 when asked what sorts of assets should be included in QE, his response: “we discussed all assets BUT gold.”
Well of course the ECB will never buy gold – by its very nature, the precious metal stands for everything the legacy insolvent regime patched together with the superglue of money printing central-bankers, hates: prudent use of money and leverage, living within one’s means, and most importantly, saving not spending. Gold applied to the current regime where the world is drowning in about 3.5 times more debt than GDP would mean wiping out trillions in equity value that should not exist.
It also makes impossible such monstrous abortions as $1 quadrillion in global derivatives which, like a house of cards, is only as strong as the weakest counterparty, and is why central banks around the globe have gone all in on the Greenspan/Bernanke/Yellen/Draghi put, and will never allow another major bank to fail again.
Ironically, while the “very serious”, if laughable and totally discredited people, take every opportunity to bash gold, they are quietly buying up all the physical gold they can find, whether it is in London (where the local vaults are practically empty), or in Beijing or Bombay, which are the largest natural sources of demand for physical gold.
Lately these same “serious” people are starting to get nervous, because while most other “commodities” have seen their prices plummet in the biggest crash since Lehman, gold just went green for the year. And the last thing the financial system, already teetering on the edge of global recession, can handle is another massive momentum wave out of “intangible” assets and into very real gold, like what happened in 2010 and 2011 before the BIS ended gold’s meteoric rise in September 2011.
Enter Goldman, which moments ago admitted that while its “base case is still for higher US real interest rates, lower gold”, it may be wrong adding that “while our base case remains for higher US real rates and lower gold prices, there are significant risks that our forecast for gold price weakness is pushed out, should the Fed surprise us and remain on hold in December.”
From Goldman’s Max Layton
Gold has rallied by almost 8% since its July lows, leaving the price flat over the 2015 calendar year to date, which represents substantial outperformance relative to most other commodity prices (see chart below). Indeed, prices are near our forecast as we expected only a gradual decline in prices in 2015 (please see Central banks stall a more bearish gold outlook, published January 25, 2015).
The rebound in the gold price was associated with a strong pickup in comex net speculative positioning (Exhibit 7). In July, August and early September, the net speculative long position build was associated with short covering of comex speculative positions, but more recently the rise in net speculative positioning has been associated with both new gold long positions and further short covering (Exhibit 8).
Actually, no. The biggest reason for the recent surge in gold is a direct consequence of the Fed losing credibility, and confirming yet again that the market calls all the shots, even it means debasing the dollar and sacrificing the reserve currency. In other words, it means that the more Yellen avoids renormalizing monetary policy – and since she is trapped, even the most modest rate hike will lead to an immediate rate cut and/or QE, just like in the Japan experience from August 2000, the higher gold will rise.
Goldman admits as much:
Looking ahead, our economists continue to expect a 25 basis point rate hike at the December FOMC meeting, and for a further 100 basis points of rate increases during 2016. The Fed leadership has signaled that such a move is likely if the economy and markets evolve broadly as expected, and our economists’ forecast is similar to theirs. However, they are only about 60% confident. Most of the uncertainty relates to the possibility that the economic and market environment – or in a broad sense, “the data” – will be worse than the FOMC’s (and our) expectations.
The low market-implied probability of a December hike of only 30%-40% probably reflects a mixture of concerns about the data (which we find reasonable) and a belief among some market participants that the FOMC will find an “excuse” to stay on hold even if the economy does fine (which we find unreasonable). The low market-implied probability is not a problem now, but Fed officials will need to find a way to move it much higher by the time of the meeting if they really do want to hike.
The Fed’s rationale for wanting to start the normalization process is straightforward. In their view, labor market slack has diminished substantially, the link between slack and inflation is stronger than widely believed, and the funds rate is far below the longer-term equilibrium rate, so they need to get started well before the economy is back to normal.
Goldman also finally admits that 7 years after it started, central-planning is not going quite as planned, with the biggest “risk” being another major move higher in the price of gold:
While our base case remains for higher US real rates and lower gold prices, there are significant risks that our forecast for gold price weakness is pushed out, should the Fed surprise us and remain on hold in December.
So in light of all this information, what does the TBTF hedge fund with the FDIC backstop want you to do? Why sell it to Goldman of course!
Indeed, notwithstanding the fact that the “new normal” equilibrium in interest rates remains uncertain, a plausible range of scenarios all imply lower gold prices. Overall, our forecasts are unchanged, however we roll our forecasts along the existing price forecast path, such that our 3/6/12-month forecasts are $1,100/oz, $1,050/oz, and $1,000/oz, respectively.
Right – so Goldman, which has been almost as wrong about its “economic recovery” forecasts as the Fed, not only is confident that “this time” it will get it right, but that gold will plunge even though in the sentence right before it the central banker-spawning hedge fund admits there as “significant risks” that its gold forecast will be “pushed out”… which is economist talk for “wrong.”
And just in case Goldman is wrong, it would love to rid you of any barbaric relic you may currently have. So run, sell it all now, before it plummets to $1,000 or lower in the coming months. You won’t even have to look far for a willing seller: Goldman will buy all you have to sell.
This article was posted: Thursday, October 22, 2015 at 6:07 am