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Goldman Sachs Revises Gold Price Outlook

Silver Rally Ahead

Written by Brian Hicks
Posted April 11, 2013

Gold has had a good run, but it’s coming to an end soon.

That’s what Goldman Sachs (NYSE: GS) would like you to believe, according to its latest projections for the precious metal, which reduces 3-month targets to $1,530/oz (down from $1,615/oz) and 12-month projections down to $1,390/oz from $1,550/oz.

Gold has had a tough time recently, as Bloomberg clarifies. Over this year—and we’re barely halfway in—gold has dropped 5.8 percent as anticipation keeps growing that the Federal Reserve is seeking to draw down its continued stimulus program.

gold barsThe SPDR Gold Trust’s (NYSE: GLD) assets dropped to just 1,200 metric tons two days back—the lowest volume since June of 2011. And even Deutsche Bank AG (NYSE: DB) has slashed its forecast for gold through this year, indicting a stronger dollar and anemic demand for gold-as-safe-haven buying worldwide.

Bloomberg quotes Goldman Sachs’ report:

“Despite resurgence in euro-area risk aversion and disappointing U.S. economic data, gold prices are unchanged over the past month, highlighting how conviction in holding gold is quickly waning,” the Goldman analysts wrote in the report. “While higher inflation may be the catalyst for the next gold cycle, this is likely several years away.”

Why Are They Down on Gold?

The general consensus seems to be that a U.S. recovery is indeed underway and will likely gain steam in the coming months. Accordingly, Goldman Sachs recommended shorting a Comex gold position, with a stop at $1,650 and a target of $1,450.

Credit Suisse Group AG (NYSE: CS) was another major name that projected reduced gold performance, expecting it to go down as much as 9.2 percent to just $1,580. That makes Credit Suisse part of a pessimistic group including Barclays Plc (NYSE: BCS), Societe Generale, Danske Bank AG, and BNP Paribas SA—all of whom are calling for lower prices on average in 2014 than through this year.

Adding to gold’s woes, ETP holdings have fallen steeply—around 7.6 percent so far this year—while other metals like silver, palladium, and platinum have shown surprising gains. And, of course, Goldman’s pessimistic report did nothing to help gold, which saw futures drop another 2 percent riding on that report.

Lack of certainty from the Fed regarding its stimulus program isn’t helping either, and the steadily strengthening dollar and bounce in equities means gold is in for a rough phase. As recently as March 20, the Fed was unable to reach any clear consensus on what it plans to do with the stimulus program.

There are increasingly caustic divisions within the Fed itself regarding the future of the program; some argue for a deliberate draw-down beginning now, while others insist on staying the course.

Since gold’s rally has been heavily reliant on such stimulus programs from the Fed and its equivalents worldwide, any rumors that trouble those waters implicitly spell bad news for gold. However, there has been no real remark yet from Chairman Ben Bernanke—even after March’s dismal jobs figures—regarding which way the Fed intends to go.

A Silver Lining

But where does all this uncertainty leave you? Try silver.

That metal, which has consistently been cheaper than gold and has far wider industrial applications, has now taken on renewed luster. Silver hovers around $27/oz—down from about $50 just a year ago. It’s cheaper than gold, certainly. And Europe reports prices of around $40/oz.

Demand is definitely there, even if supply is sporadic (see the recent suspensions of silver coin sales by the U.S. Mint, for example). Silver Wheaton Corp. (NYSE: SLW), the biggest silver mining company, recently earned 50 cents in Q4 and exceeded quarterly earnings of the previous year by $0.09. Year over year, profit was up 22.8 percent, to hit an all-time high of $177.7 million.

Silver equivalent sales increased by 53 percent in the same period. In other words, 7.3 million ounces of silver sold to 33,000 ounces of gold.

Silver, clearly, has become an attractive bet—along with other metals like platinum and palladium that have widespread industrial uses. The last two are both widely used in automotive works in the manufacture of catalytic converters.

Gold, despite Goldman Sachs’ gloomy noises, should remain a safe haven investment at least in the near future. Certainly it is fluctuating badly in response to wider uncertainties, but the larger picture inevitably positions gold in a strong place, particularly for the long term.

 

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