Thanks to Monday morning’s “fat finger” (or “nefarious attempt to manipulate markets,” depending on how predisposed you are to conspiracy theories) that saw gold plunge $18 in seconds on surging volume (18k contracts in a one-minute window) for no apparent reason, everyone’s favorite shiny yellow doorstop is the market’s topic du jour.
“Trade shot up to 1.8 million ounces of gold in just a minute, a level not reached even with the surprise election of U.S. President Donald Trump or Britain’s vote to leave the European Union,” Bloomberg noted earlier today.
“This bears the hallmarks of a fat-finger ‘Muppet’ — a trade of 18,149 ounces would be a very typical trade, but a trade of 18,149 lots of a futures contract (which is 100 times bigger) would not be,” Ross Norman, chief executive officer of Sharps Pixley Ltd., a London-based precious-metals dealer, said in a note. “It leaves us wondering if a junior had got confused between ‘ounces’ and ‘lots,’” he added.
So that’s amusing.
But Goldman thinks maybe you should look past that rather unfortunate incident and think about the fundamental outlook, especially considering gold’s correlation with global bonds is now at the 100th percentile.
Here’s more from the bank’s latest GOAL Kickstart note (always out on Mondays)…
Across asset classes last week copper was the best performing asset (+2.5%), while oil was the worst performing asset (-4.3%, Exhibit 3). Gold’s performance was flat (+0.1%) over the same period, but had an intraday min at 1.6% today. Much of the focus has obviously been on oil where concerns are that expanding supply in the US and Libya will counter OPEC cuts. Gold has received less focus, although its cross-asset correlations have quietly been rising to new extremes (Exhibit 1).
Our commodity team’s view is gold at $1250/oz over 12 months as higher real rates from Fed tightening could put further pressure on gold, but this may be offset by 3 things:
- lower returns in US equity (as we expect) should support a more defensive investor allocation,
- EM $GDP acceleration would add purchasing power to EM economies with high propensity to consume gold, and
- GS expects gold mine supply to peak in 2017.
Gold has been increasingly trading as a “risk off” asset, with its correlation with global bonds at the 100th percentile since 2002, and should thus be sensitive to our expectation of rising rates from here. However, with global growth momentum likely having peaked, gold could represent a good hedge for equity, in particular in currencies with low and anchored real yields. Gold implied vol remains attractive for investors’ of either view: it trades at its 0th percentile relative to the past 10 years