Goldman Sachs’ head of commodities research Jeffrey Currie is at it again. The man who not so long ago described gold as a ‘slam dunk sell’ is reiterating his prediction that gold will fall back to $1,050 this year despite the metal’s stellar performance so far. While Currie’s academic qualifications for making these kinds of predictions are probably far better than those of this writer, we think his very vocal pronouncements are misguided and potentially have a degree of self-fulfillment given the regard with which Goldman Sachs is held in the financial sector; damaging to the gold market in itself.
While Currie is obviously entitled to his viewpoint we are not sure that stating these views in such aggressive terms is wise. If he proves wrong – and those who’ve followed his advice so far this year may already feel badly served – he is left with a vast amount of egg on his face, and his subsequent commodity price predictions will be largely discounted. Personally I feel he might be wise to be a little more circumspect in his comments, but perhaps they are necessary to balance the views of the ultra gold bulls who are even more vocal in predicting enormous gold price increases ahead..
Currie predicates his latest projections on his view that the gold price rise so far this year has largely been driven by what he feels are three unsustainable factors. Indeed one of these factors is obviously unsustainable – a weather-induced slowdown in the U.S. economy (although we wouldn’t necessarily put that as a gold price driver ourselves). His other two gold price defining factors are Chinese credit concerns, which may, or may not, have in reality had any impact on the gold price, and the increased geopolitical tensions arising from the fallout over Crimea.
While the latter development is, one supposes, a crisis which will eventually fall out of the headlines when the world gets bored with it, it still has the potential for major escalation given how strongly the Western and Russian viewpoints are opposed to one another. This one could run and run as witness gold’s recovery to the $1340 level at the time of writing in the face of yet another very limited response to the situation in the form of increased travel and financial sanctions applied to individuals rather than to the Russian state this morning. This is just another relatively minor slap on the wrist for President Putin and his allies. Talk of further economic sanctions being put in place should Putin escalate things further could be looking more and more like empty rhetoric and may thus encourage him to do so. He does not want an EU/NATO-leaning state on his borders which could well lead to further moves to prevent this and, perhaps, really force the West to take some kind significant economic action which could then yet escalate the situation sharply. President Obama’s response to today’s ratification of the annexation of Crimea by Russia’s Parliament and Putin’s signing it into law is thus awaited with some interest.
The Goldman viewpoint as expressed by Currie is also based on the potential for real interest rates in the U.S. to rise as the year progresses with a correspondingly adverse effect on gold. He describes this as having the “potential for a meaningful decline in gold prices towards the level implied by 10-year TIPS yields, which our rates strategists expect to rise further this year, and reiterate our year-end $1,050/toz gold price forecast.” Currie has been consistent in his view that U.S. Fed tapering and the thus implied improvement in the U.S. economy is bearish for gold.
But he also seems to have studiously avoided any comment on the impact of a change in the physical demand situation, which appears at the moment to be seeing a reversal of the trend for sales of physical metal out of the big gold ETFs. Meantime, Eastern demand for physical metal remains strong and could well rise sharply if India reduces its import restrictions for physical metal as many expect. Indeed the SPDR Gold Trust ETF (ARCA:GLD) has drawn in 18 tonnes of gold so far this year as against a 128 tonne offloading of gold at the same stage last year – a cumulative difference of 146 tonnes. Last year’s sales out of GLD and other gold ETFs were seen as perhaps the key contributor to the collapse in the gold price over the year, so any reversal of this trend has to be of major significance, but is seemingly totally ignored by Goldman and Currie. Likely Chinese demand this year is, of course, still an unknown factor but if it continues at anything like last year’s levels, taken in conjunction with any turnaround in the ETF purchases/sales statistics, this has to play an increasing role in the likely level of the gold price.
Thus there is a feeling that Currie’s and thus Goldman Sachs’ views are blinkered, looking only at some drivers – which may, or may not, fade through the year – and totally ignore other factors which may be of equal or even greater importance in the scheme of things.