Goldman stays gold bear

July 14, 2014 09:17 AM

Goldman Sachs Group Inc.’s Jeffrey Currie isn’t backing down from his bearish call on gold.

As bullion’s 10% rally this year beats gains for equities, commodities and Treasuries, he’s sticking with the view that the metal will be lower by the end of December as the economy improves. Currie, who last year got ahead of the biggest gold collapse since 1980, is an undeterred bear even as hedge funds add to their bullish holdings for a fifth straight week and assets in exchange-traded products advance.

Currie isn’t alone in predicting the end to a rebound that drove the best first-half performance for gold since 2010. Societe Generale SA’s Michael Haigh, who also correctly forecast 2013’s slump, said in a July 11 report that he expects the metal will drop about 6% by the fourth quarter. Defying the analysts, money mangers are now holding the biggest bet on a bullion rally since 2012 as prices posted the longest streak of weekly gains in three years.

“Some people are moving into inflationary hedge assets,” Currie, the bank’s global commodities research head with a Ph.D in economics from the University of Chicago, said in a July 11 telephone interview. “Gold will start moving lower once there is more confidence in the recovery, without significant inflationary concerns.” Prices will “likely end lower this year,” he said.

Longest Streak

Futures gained 1.3% last week to $1,337.40 an ounce on the Comex in New York, a sixth straight advance and the longest streak since August 2011. The Bloomberg Commodity Index of 22 raw materials climbed 3.3% this year, while the MSCI All-Country World Index of equities rose 4.9%. The Bloomberg Treasury Bond Index increased 3.3%. Gold futures were at $1,323.20 in New York today.

The net-long position in gold rose 5.4% to 144,272 futures and options contracts in the week to July 8, according to U.S. Commodity Futures Trading Commission data. That’s the highest since November 2012. Short holdings have fallen for five straight weeks.

After 12 straight years of gains, gold tumbled 28% in 2013 as an equity rally prompted some investors to lose their faith in the metal. U.S. consumer costs rose 1.5% in the 12 months through December, compared with an average of 2.4% in the previous decade. The inflation rate rebounded to 2.1% in May, the latest government data show.

Currie on April 10, 2013, issued a sell recommendation, before a two-day 13% plunge that ended April 15, 2013, and left prices in a bear market. The slump wasn’t foreseen by most money mangers, who had increased their bullish bets by 11% the prior month. The investors cut holdings to a six- year low by December.

Currie Forecast

Now, Currie expects bullion to drop to $1,050 by the end of 2014, maintaining a forecast from the start of the year. SocGen’s Haigh sees the metal at $1,245 in the fourth quarter.

Investors aren’t convinced prices will fall. After violence spread in Iraq and Ukraine and the Federal Reserve signaled it will keep interest rates low, the need for a haven asset resurfaced and gold was back in favor. Holdings in bullion- backed ETPs rose for three straight weeks through July 11, the longest stretch in four months. Last year, more than $73 billion was wiped from the value of funds as investors sold 869 metric tons of the metal.

Interest Rates

Yields on 10-year Treasury notes, about 3% at the beginning of the year, have come down to 2.5%, as the Fed has signaled it’s in no rush to boost interest rates. The central bank in June repeated its view that the rates are likely to stay low “for a considerable time.” Goldman this month revised its forecast for higher borrowing costs to the third quarter of 2015, rather than the first three months of 2016, citing an accelerating economy.

Bullion jumped 70% from December 2008 to June 2011 as the Fed bought debt and held borrowing costs at an all-time low.

“There have been too many bears in the woods in spite of gold climbing,” George Gero, New York-based precious metals strategist who helps manage $500 million at RBC Capital Markets LLC, said July 10. “Geopolitical tensions in various parts of the world and economic surprises are attracting more investors. Probably we will see a re-rating of those bearish forecasts.”

Bullion is still down 31% from an all-time high of $1,923.70 reached in September 2011 as the U.S. economy showed signs of sustained growth. Jobless claims declined to 304,000 in the week ended July 5, the fewest in more than a month, a government report showed July 10. The Standard & Poor’s 500 index rose to a record this month.

Commodity Wagers

Combined net-wagers across 18 U.S. traded commodities fell 8.9% to 1.17 million contracts as of July 8, the CFTC data show.

Bets on rising oil prices fell 7.8% to 304,366 contracts, while those for copper surged 55% to 38,367, the highest since December 2010.

A measure of net-long positions across 11 agricultural products slumped 14% to 515,996 contracts, the lowest since February. Cotton holdings fell to the lowest this year, and wagers on a decline for wheat expanded for a fifth straight week.

Investors are holding the smallest bet on a soybean rally since they were net-short in December 2011. Prices in Chicago fell for 10 straight sessions through July 11, the longest slump since 1973. U.S. stockpiles will more than double before the start of the 2015 harvest, the government said last week.

“Earlier this year, it was all about agriculture prices rallying because of weather, but supplies have come back so quickly that we have seen a big reversal,” Jack Ablin, who helps manage $66 billion in assets as chief investment officer of BMO Private Bank in Chicago, said July 10. “People have become more comfortable about the global crop situation.”

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