Wednesday, April 16, 2014

Gold going down -- anyway that's what the big banks are saying

There is one thing for sure when the market is certain of one thing, usually the opposite occurs.  Morgan Stanley and Goldman Sachs are both telling their clients that gold is a sure thing for $1,050 -- or a drop of about 15%.  As Mish Shedlock tells it the big bank have a long dated habit of telling their clients one thing and doing the opposite.  Mike's point is that you cannot trust the big boys their are playing there own games.

First off, the big players like MS and GS (Citi too for that matter) have a reputation for saying one thing and then doing the opposite.  IN 2008 GS were encouraging their clients to buy CDS, but the bank's prop book was very short.  Giving the prop book massive profits -- despite near bankruptcy for part of the banking system, it remains a prime cautionary tail.

Back to the gold story.

There is an issue with gold's price gyrations, which is often unconnected from any macro or micro economic drivers (very low correlation to the market activity).  In the late 00s Gold was seen as a safe haven for investors.  Yet today the same global uncertainties are rising (you've got Russian tanks in the Ukraine, and you've got some real estate news out of China (bubble popping).  Bottom line Gold is been trading in the USD1,200 -- 1,4000 range for some months now.  There is no reason for a serious downward movement.   

So why are GS and MS bearish on gold?  My guess is that its because analyst are like university professor:  publish or die.  Analysts need to say something, to stay in the news (be controversial)  to provide commentary on the market direction even when they don't have a clue.  My guess is that these guys suddenly decided that Gold was not sexy.  There are always reasons to be contrarian; emphasis one aspect ignore or undermine the reasoning behind another and voila, you've got a reason to all negative on gold!

The worse part is that there are three distinct demand drivers for gold:  Jewellery, investors and central banks.  All three have different demand curves, often central banks will be selling gold when its cheap and buying when its expensive.  Jewellery (excluding India) is driven by economic growth, and investor demand is governed by fear and opportunity.  It is virtually impossible for the ordinary investor to make an informed analysis on these three demand drivers -- and government demand in particular is the worse, since data on gold holding is only provided annually.  Last year Russia was a big buyer, we only found out in late 2013.

Anyway now you know!


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