Back on February 15, just as the USD was about to plunge unleashing a global risk-on rally as a result of “Yuan stability”, Goldman triumphantly announced its latest trading recommendation: short gold (at $1,205) with a target of $1000 and a 7% stop loss.
This being Goldman – the one hedge fund whose prop traders immediately take the other side of all trades pitches to clients – said clients were immediately and brutally taken to the cleaners as the consequence of a tumbling dollar (another trade that Goldman got disastrously wrong) was soaring gold. And that is precisely what happened. After that, unofficially, it took just two and a half months for Goldman to get stopped out of its short gold recommendation, which as we first noted, happened on April 29, when its the price soared above $1,300 breaching Goldman’s stop. Officially, Goldman’s Jeff Currie decided to take his time, although he too finally threw in the towel today admitting Goldman was wrong yet again with one more trading recommendation (recall that Goldman had earlier been stopped out and lost money on 5 of its Top 6 trades for 2016 in just over a month).
But instead of doing the right thing and also admitting it has zero idea how to trade gold, where it will go next or what the catalysts are, Goldman decided to change its price targets, and instead of predicting $1,100/oz in three months, Goldman has generously pushed its price target by $100 higher to $1200 (and $1,050 over 12 months), even as gold traded just shy of $1300 a few days ago and only dropped as a result of the recent USD rally.
In other words, Goldman admits it was wrong, but still remains indirectly short gold as it is still hoping to skewer even more muppets on the very same trade it has gotten wrong for the past 3 months… and in the process buy their gold if possible.
Here is the “explanation”
Our US economists recently reduced their forecast for Fed funds rate hikes over the next 12 months from 100 bp to 50 bp. Corresponding with this, our global rates team has lowered its forecast profile for 10-year US real rates over the same period. As a result, we reduce the downside to our gold price forecast, raising the 3/6/12 month forecast profile to $1,200/1,180/1,150/oz from $1,100/1,050/1,000/oz. Our new year average price forecasts are $1,202/1,150/1,150/oz from $1,124/1,000/1,050/oz. Though we forecast that gold prices will decline from spot over the next 3-12 months (with c.5%-9% downside), for reasons which we detail below, the changes to our economists’ rates forecasts act to reduce the degree of downside to our modelled gold price profile and thus change the risk-reward of our previously implemented short gold trade recommendation (published February 15), which we close as a result at a c.4.5% loss.
Or, you could have simply remembered that you had a 7% stop and that you were stopped out 2 weeks ago, which any trader would know very well if he actually had the trade on instead of just using it as bait for clients to unload their gold. Perhaps Mr. Currie can also tell us what Goldman’s “flow” trader P&L was on the “short gold” trade.
On the other hand, since nothing could have been more bearish for gold than Goldman going outright long the metal, we are delighted that Goldman is still buying gold – as it asks its clients to sell it their gold – because it means that the upside for gold remains unlimited. This is also the opposite of what Goldman has tried to – yet again – convince the handful of Kermits who bother to even listen to the taxpayer bailed out hedge fund with the worst trading recommendation record since Tom Stolper (incidentally another former Goldmanite) and of course Dennis Gartman.
For those who care, this is what else Currie said – it is mostly a verbatim copy of what he said in mid-February with the exception that he now admits he was wrong with the short gold then, and that he is “rising” his target price by $100.
In our view, the gold rally during 1Q16 was driven primarily by concerns about the ability of US policy rates to diverge, corresponding Fed dovishness, and US real rates weakness, as well as a depreciating US dollar (both against the G10 currencies as well as against the EM currencies, the latter on the back of a transitory China credit stimulus). Furthermore, we have seen the largest ever increase in gold net speculative positioning over the past three months, with net speculative length now near its post global financial crisis peak.
Looking ahead, we see limited upside for gold pricing given the limited room for the Fed to surprise to the downside (the market is pricing c.16 bp by end of 2016 and less than one 25 bp Fed Funds rate hike over the next 12 months), limited room for the dollar to depreciate (net speculative positioning is the shortest it has been since early 2013, Exhibit 1, please see Global Markets Daily: The Dollar Bottom, published May 10, for details), and limited room for China to drive EM currency strength to contribute to dollar weakness.While the upside risks to gold pricing appear relatively limited from here, we see a number of catalysts for gold prices to moderate, including a more hawkish Fed and ultimately US policy rate divergence (Exhibit 3), corresponding with gradual dollar appreciation over the next 3-12 months. Indeed, while Friday’s jobs report was a modest disappointment, with a 160k rise in nonfarm payrolls, some downward revisions to prior months, and declines in both household employment and labor force participation that reversed some of the big gains of the prior six months, the bigger picture, in our view, is still one of gradual acceleration as the US labor market moves to full employment and temporary factors such as the weakness in energy, import, and healthcare costs become less important as we move through 2016. As such, we still see the economy on a path that will prompt the FOMC to restart the normalization process before too long—most likely in September but perhaps as early as July. After the soggy numbers of the past two quarters, we expect GDP growth to rebound to a 2¼% pace as the drag from the earlier FCI tightening (Exhibit 5)—which by our estimates has subtracted about one per centage point from growth recently—abates and the fundamentals for domestic demand, especially housing and consumption, remain favorable.
This next sentence is our favorite:
In addition, there are reasons to believe that the risk off environment which contributed to gold’s outperformance at the beginning of this year is less likely to repeat in the near future as confidence in Chinese growth, Chinese currency stability, and the potential for a collapse in oil prices is much reduced.
Why is it our favorite? Because just a few hours earlier another Goldman report warned that in its quest to keep the bond market stable, central banks may unleash “Financial Turbulence” and “Rate Shock.” We can only assume that Currie had no idea. It’s almost as if Goldman doesn’t even bother to pretend to have a coherent story when ripping clients off.
As for Goldman’s vapid, deja vu conclusion…
In terms of risks surrounding our bearish gold view, we view them as broadly balanced. An upside risk to our forecast is that lower-than-expected Chinese growth significantly impacts US equities, consumer confidence, and growth, thereby resulting in lower increases in real rates relative to our forecast profile. A downside risk relative to our base case is a large reduction in the pace of Chinese and Russian central bank buying (since mid last year, buying has been running at a very high rate of c.450 tonnes per annum).
… it is missing just one thing: what is Goldman’s next stop loss, because that is where gold is really headed next.
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