The Heisenberg crowd is well aware of how we feel about gold.
Although it might surprise you considering our generally skeptical outlook on markets and our enduring cynicism with regard to the fact that central banks have printed 18.5 trillion in paper liabilities trying to bid up the price on paper assets, we’re not sure why anyone buys gold as a hedge against the apocalypse.
Here’s how we put it earlier this year:
I don’t talk a lot about gold and there’s a reason for that. Here’s something new readers might not expect me to say based on my penchant for playing the boy who cried “black swan”: gold is useless.
It blows my mind that we’ve singled out one shiny metal as the safe haven asset par excellence.
It’s not so much that I buy the whole “barbarous relic” thing. Using the term “relic” suggests that at some point in history there was a rational argument for why something was useful. I mean if it’s a “relic” now, it must have been cherished a long time ago or we wouldn’t be applying the term “relic” to it, right?
Well gold should have never been cherished. It’s just a shiny piece of metal. Yeah, there’s a finite supply of it, but there’s a finite supply of a lot of stuff. There’s a finite supply of Heisenberg, but as far as I know no one is willing to pay $1240 for an ounce of me (if you know of anyone who is, please drop me a line).
The worst thing about the idea that gold is something to own as a safe haven is that if things do go to shit, it’ll be even more useless than it is now. Has anyone seen The Road or read the book? Well if we find ourselves in Cormac McCarthy’s apocalypse, no one is going to want your gold because we can’t eat gold, we can’t drink gold, and we can’t burn gold for fuel (no one tell Donald Trump).
Got all that? Good.
Well needless to say, shiny doorstops have had a relatively rough go of it lately amid the risk-on mood that accompanied the market-friendly result of the first round of the French elections.
So the question a lot of people are asking (where “a lot of people” doesn’t include us) is this: “will the gold sell-off continue?”
Here’s what Goldman thinks.
Gold has fallen by c.$50/oz over the past week and a half, from $1,288/oz to $1,238/oz. In our view, the decline has reflected a number of factors, including, initially, a market favourable first round result in the French presidential election, which saw prices fall from $1,288/oz to $1,276/oz early last week.
The move lower in gold from c.$1,276/oz early last week, was associated with a rally in US and other global equity markets (outside of China), with the US rally driven by stronger than expected earnings and further news regarding the White House’s tax plans. Further, a US government shut down was avoided during this period, and the situation in North Korea has not escalated. During this period the number of Fed rate hikes priced in and US long dated real rates were largely unchanged, so we do not believe these contributed significantly to the price declines during this period.
The last leg lower in gold since Wednesday afternoon to $1,238/oz, likely reflected the stronger than anticipated US non-manufacturing ISM and marginally hawkish FOMC (inflation is “running” instead of “moving”) statement.
In the very near term we continue to expect that gold will trade moderately lower – our 3-month target is $1,200/oz, as a number of bearish catalysts have yet to fully play out. However clearly the upside to a near term short gold trade or near term producer hedging has diminished with the recent price declines.
The main catalysts for further very near term downside in gold, in our view, is a repricing of US rate hikes (higher) and a QE reduction (faster) on the back of an increased expectation of US tax reform or infrastructure delivery (cuts) or solid US and global economic growth. In particular, our US economists expect 2 rate hikes – in June and September – vs the market pricing of c.1 hike. Also, in the very near term our economists are expecting payrolls to rise by 200,000 vs market of 185,000 this Friday. At the same time, we continue to expect Chinese buying is likely to be a key downside support sub $1,200/oz, should we retrace to, or below, these levels.
Over the medium term, we would see any significant further pullback in gold as a buying opportunity as our 12-month target remains $1,250/oz. On a 12-month view from current prices, we still remain broadly agnostic on gold from current levels, as our primary commodity view is one of a stronger cyclical backdrop; and how the Fed responds to this environment, and hence the path real interest rates follow, is still uncertain (US real rates are the primary driver of our gold pricing model). Nevertheless, our work points to some constructive medium to longer term dynamics, including a weak supply growth outlook based on the global gold capex cycle, high valuations in competing asset classes (our year-end S&P 500 target is 2300 based on valuation concerns), and a strong outlook for emerging market dollar savings, which should support demand growth.