Gold Investing: The End of the Gold Bull Market? - 6 December 2012
Why Goldman Sachs sees gold topping out soon...
IT'S FINISHED! Over! Finito!
Gold's bull market is due to end imminently – at least according to some of yesterday's headlines, writes Ben Traynor at BullionVault.
The story is that Goldman Sachs has called the end of the gold bull market. Given the nature of BullionVault's business you might be expecting us to issue a shrill rebuttal of this call, perhaps with a few out-of-the-park bullish forecasts of our own thrown in for good measure.
We're not going to do that. We can't see the future any better than the next man; for all we know this prediction, one of the many constantly being churned out, could turn out to be correct.
Instead, let's look a little more closely at what Goldman said yesterday. The investment bank has cut its gold price forecasts for the next three, six and 12 months. The 12-month forecast has been cut by 7.2% to $1800 an ounce, while Goldman has added a 2014 forecast of $1750.
"While we see potential for higher gold prices in early 2013, we see growing downside risks," say Goldman's commodities analysts.
The reason? A stronger US economy and higher real (i.e. inflation-adjusted) interest rates as a result. This has become a house view at Goldman recently, and it follows from this that gold might struggle in such an environment. If other investments or even cash in the bank yield a positive real return there is less incentive to hold on a non-yielding lump of precious metal.
Many savers and investors are crying out for a stronger economy and positive real interest rates. We'd wager many gold investors would benefit from such an environment overall; the value of their gold holdings might fall, but other parts of their portfolios would likely rise.
Of course, the obvious question is: what if things don't pan out the way Goldman predicts? What if the US economy falls back into recession, and the Federal Reserve has to introduce more accommodative measures, further undermining the value of the Dollar?
There are gold investors who buy gold and hope it goes down – but they want to have some, just in case. For us, this insurance motive is a core reason for owning gold. We also find we get a better night's sleep if we're not worrying about the latest analyst forecasts and short-term price moves, but maybe that's just us.
For now, gold and silver's price action continues to look weak, as open interest in Comex gold futures continues to decline. Longer-term players are still buying in though, with gold exchange traded fund holdings setting another new record yesterday. And as our Gold Investor Index for last month shows, self-directed investors are also building their gold positions ahead of 2013.