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Goldman Sachs cuts gold predictions

TradingPub Admin | February 27, 2013

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Major financial services firm Goldman Sachs Group Inc. recently lowered its price forecasts for gold for the near future, as the speculative bets made by investors deteriorate and as market participants grow more optimistic about the existing economic expansion in the U.S. 

Recent declines
Reuters notes that the price of the metal has already plunged thus far in 2013, falling to its lowest in seven months during the week ending February 22.

The uncertainty surrounding the future of the metal intensified that week, as markets responded to minutes released by the Federal Open Mark Committee, which indicated significant division between the voting members on when the existing bond-buying program of monetary stimulus should end, according to the news source. 

Extended losses
"Gold prices sold off sharply over the past two weeks, extending the decline that started last October," the bank wrote in a note dated February 25, according to the news source. 

"Most of this price decline has coincided with a gradual increase in U.S. real rates, reflecting the combination of better-than-expected U.S. economic data, a more hawkish interpretation of recent Fed communication and a lower level of U.S. fiscal and European sovereign risks."

Price predictions
The major financial services firm lowered its price forecasts for three, six and 12 months from now, according to Bloomberg. Goldman Sachs reduced the first prediction to $1,615 per ounce from $1,825. It cut the six-month forecast to $1,600 from $1,805, and the 12-month prediction to $1,550 from $1,800. 

The 2014 gold price prediction of the major financial services firm was also reduced, dropping to $1,450 from $1,750 per ounce, Reuters reports. 

Major contributing factors
One major event that has been cited by many market experts is the recent sharp drop in the holdings of gold contained by exchange-traded products (ETPs), Bloomberg reports. During the most recent quarter, funds led by Louis Moore Bacon and George Soros both sharply reduced their interests in gold ETPs. 

Data provided by the media outlet reveals that the amount of metal held by these products declined 2.9 percent in February and plunged to a five-month low on February 25. 

The authors note the importance of the recent divestments in gold-backed exchange-traded funds (ETFs), stating that the recent plunge in the metal held by these ETFs "stands in sharp contrast to our assumption that ETF positions were likely driven by longer-term allocation rather than short-term trading." 

QE
"Our economists believe that the downside risks to their forecasts have diminished while the uncertainty about the size of QE3 is high," the Goldman report stated. "We believe that a shift has occurred over the past few months with conviction in holding gold waning quickly." 

Federal Reserve Chairman Ben Bernanke announced late last year that the U.S. central bank would start purchasing a total of $85 billion worth of debt-based securities per month for as long as was required to make a significant dent in the existing jobless rate. 

The minutes provided by the last few FOMC meetings have made it seem uncertain how long this program will last, or when it will be altered. 

Next phase of 'price cycle'
The authors of the report stated in the document that "the turn in the gold price cycle is likely already underway," as a result of the recent drops in price that the metal has incurred during the final quarter of 2012, the extended declines this quarter and the new forecasts, according to Reuters. 

They added that "as a result, although our U.S. economic forecasts point to modest near-term upside to gold prices, we believe that a sharp recovery in prices to our previous price forecast is unlikely."

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