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Is Goldman Sachs Lying About Gold?

Why New Highs Are Coming for Gold

Written by Briton Ryle
Posted December 10, 2012

My BS detector went off like an air-raid siren.

Last week Goldman Sachs said the bull market for gold was over.

Any time Goldman Sachs goes public with a recommendation to buy or sell any asset, you should be very careful...

Chances are very good that Goldman is simply talking its book.

In other words, they are trying to influence investors to behave in a way that will benefit their bottom line.

Shenanigans like this are standard operating procedure for Goldman:

  • In 2010 Goldman paid a $550 million fine for selling mortgage-backed securities that it knew would fail, and then making very profitable bets that these same securities would fail.

  • Earlier this year, Goldman paid $22 million for “front-running” — giving its best research and trading ideas to its “preferred” clients first, before making the same information available to everyone else.

  • Just two months ago, Goldman agreed to pony up $16 million for a “pay-to-play” municipal bond scheme in Massachusetts. Goldman was making campaign contributions to a certain politician who, once in office, would steer the state's muni-bond business to Goldman.

Yes, it's outrageous. Downright appalling.

But practices like these will remain business as usual for Goldman, because the profits they make far outweigh the penalties.

When it comes to Goldman, forewarned is forearmed. If you know what the company's true objective is, you can make some profitable decisions.

Remember 2008, when oil prices ramped up to $157 a barrel? You may also recall that Goldman Sachs kept making “oil super spike” predictions, calling for prices as high as $220 a barrel...

As we later learned, Goldman had built the biggest oil trading desk in the world. The firm made a fortune as oil prices soared. And there's no doubt that Goldman's “super spike” forecasts helped.

So, now that Goldman is forecasting the end of the gold bull market, it is likely a good time to for some questions.

But first, let's be clear on what Goldman is actually saying. Here are some quotes from Goldman's report:

Our economists forecast that the US economic recovery will slow early in 2013 before reaccelerating in the second half. They also expect additional expansion of the Fed’s balance sheet. Near term, the combination of more easing and weaker growth should prove supportive to gold prices. Medium term however, the gold outlook is caught between the opposing forces of more Fed easing and a gradual increase in U.S. real rates on better U.S. economic growth. Our expanded modeling suggests that the improving U.S. growth outlook will outweigh further Fed balance sheet expansion and that the cycle in gold prices will likely turn in 2013.

We lower our 3-, 6- and 12-mo. gold price forecasts to $1,825/toz, $1,805/toz and $1,800/toz and introduce a $1,750/toz 2014 forecast. While we see potential for higher gold prices in early 2013, we see growing downside risks.

For comparison's sake, Goldman has lowered its 12-month price target for gold from $1,940 an ounce to $1,800/oz. With gold currently in the $1,700/oz neighborhood, it's clear it still sees moderate upside for gold.

The crux of Goldman's change of heart toward gold prices in 2013 is that it believes the U.S. economy will improve more than most people think. That, in turn, will put upward pressure on interest rates, help the U.S. dollar, and slow the Fed's quantitative easing. Each of these has been a catalyst for gold prices.

So, maybe it makes sense for Goldman to say gold's upside will be limited now that these catalysts are missing... maybe.

I hope you can forgive me for being skeptical. Alright, I'm more than just skeptical. I think Goldman has just a 1-in-3 chance of getting this one right.

And here's why...


It Will NOT Pay to be Bullish on the Economy

The economy can do three things: it can improve, it can stay the same, or it can get worse.

Of course, there are shades of gray for each of these...

Quite frankly, I have a hard time seeing any significant improvement for the U.S. economy. I'd say the most optimistic outcome would be for it to muddle along at 2% growth. And the risks to this “best-case” scenario are significant.

In other words: What, exactly, could propel the economy to +3% growth?

Housing? Falling unemployment?

Health care costs are going up, and that is already impacting hiring. Oil and gasoline prices will likely remain high, sapping consumer demand for goods. Government spending is likely to be cut, which will also take its toll on demand. Then, of course, we have the brutal economic situation in Europe and the moderation of the Chinese economy...

Not a very good formula for growth.

Now, I want to be very clear about one thing: I am NOT a stock market bear.

Companies have proven their money-making ability in this slow-growth environment. I expect corporate profitability to remain near record levels.

And as co-editor for the dividend-focused Wealth Advisory newsletter, I will also tell you that I am finding fantastic opportunities in dividend stocks. Given the amount of cash many of these companies are generating, I expect to see a lot of dividend hikes in the next year.

But that does not change my view on the economy or on gold prices.

Because I don't see the Fed making any policy changes in the next 12 months. I mean, can we really imagine Ben Bernanke saying he will raise interest rates? Do we really think he would do anything to strengthen the U.S. dollar?

Let's not forget that Bernanke is trying to get a little inflation cooking. Let's also not forget that he takes the Fed's mandate for full employment seriously.

No, betting for change in Fed policy is perhaps the worst bet you could make right now.

Don't Fight the Fed

It's pretty easy to see why Goldman would want to talk gold down...

In the grand scheme of things, they do better when the economy is better. There are more deals to be a part of, more IPOs and bond issues, and so on.

Still, it's curious that Goldman would come out now with this forecast on gold. Goldman is essentially fighting the Fed, and that's usually not a wise thing to do.

The case for owning gold is pretty simple: Paper currencies and inflation guarantee the purchasing power of any currency decreases over time. You have to make at least 2% on your money every year just to tread water.

Gold does this — and then some. In just the last five years, gold has gone from around $600 an ounce to $1,700 an ounce.

Does that mean it will add another $1,100/oz in the next six years? Goldman might not say so; but I'm confident gold's price will be a good deal higher than it is now.

Central banks are buying. And production rates for gold are basically stagnant for numerous reasons. That's a fundamental formula for higher gold prices.

But there's another catalyst out there, set to push gold significantly higher. It has to do with how banks are allowed to value gold as part of their capital base.

Right now, banks can only count 50% of gold's value as collateral for lending. But new rules that go into effect next year will allow banks to count 100% of gold's value as lending collateral...

This new rule will effectively double gold's value to banks.

There's no doubt Goldman Sachs knows about these new rules. And the implications are clear.

Don't let Goldman scare you away from gold...

It's going higher.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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