Back in the beginning of 2014, Goldman loudly predicted that 2014 would be the year of normalization: the economy would grow by 3%, the S&P 500 would barely rise to 1900, and gold would tumble to $1066. By now it goes without saying that it has been dead wrong about the first with the economy set for a contraction in the first half of 2014 and the full year assured to have the worst GDP growth since Lehman, wrong about the second with the market now so clearly disconnected from any economic fundamentals nobody even pretends that it is anything but the Fed manipulating a rigged stock market, and has been painfully wrong about the third.
So with less than 6 months to go until the end of the year, with various gold ETFs suddenly seeing the biggest buying in years, and with gold continuing to outperform most asset classes YTD, what is Goldman to do? Why follow the trend of course, and just like David Kostin had no choice but to boost his S&P 500 price target using the idiotic Fed model as a basis, so earlier today Goldman just upgraded its gold price target from $1,066 to $1,200. Probably this means that after accumulating it for the first half of the year, Goldman is finally preparing to sell the precious metal. Not so fast: because while Goldman did just raised its price target, it continues to have a Conviction Sell rating on Gold, which is its second most hated commodity after iron ore. Go figure.
So without further ado, here is Goldman going full schizo.
Marginal cost support at $1,200/oz levelConviction views: Bearish on iron ore, gold and copper, bullish on nickel, zinc, aluminium and palladium. In gold, we raise our LT price forecasts to $1,200/oz in $2014 terms from $1,066 earlier. Over long time horizons, the gold price has been relatively stable in real terms, keeping pace with inflation. Accordingly we use a flat real gold price forecast assuming gold is an effective inflation hedge and increase in nominal gold prices should offset the impact from inflation. We believe iron ore (-21%), gold (-20%) and copper (-12%) are the mining commodities with the greatest downside on a 12-month view.We have updated our long-term real gold price forecast to $1,200/oz in $2014 terms (was $1,066/oz) to make it more in-line with our marginal cost support level, see Exhibit 66. Currently gold is trading at a 9% premium to our LT real (inflation-adjusted) forecast but we believe on a long-term basis the price should revert back to the cost support level in-line with our estimates.
In our view, the 90th percentile of all-in sustaining costs (defined as total by-product cash cost plus royalty expense, plus sustaining capex, exploration and corporate expenses) provides a good estimate of the floor price for gold, as it is the breakeven level for the marginal producer. At times of extreme declines in demand, it is possible for prices to fall below the marginal cost support level; however we believe such events are generally shortlived. Exhibit 67 shows our latest 2014 gold’s all-in sustaining cost curve.
Over long time horizons, the real gold price has been relatively stable, keeping pace with inflation. Exhibit 68 illustrates that the real price of gold was fairly constant until the early 1970s, after which it became highly volatile. Although the real price has experienced significant volatility post the 1970s, we highlight its tendency to a mean reversion trend. The real gold price fell back to the 1950s level in 2001 after peaking in 1980, and it is currently in decline again after peaking in 2011.
Where things get downright bizarre is the last paragraph where either Goldman had a humongous typo or merely pulled the boilerplate language from a prior report where for some inexplicable reason Goldman says it has a "$1050" price target even as the table above clearly says $1,200. Oh who cares: this whole report is merely for the benefit of Goldman's prop desk, which is clearly ramping up trading, to do the opposite of whatever Goldman's few remaining clients are doing.
We continue to remain bearish on gold in 2014We expect gold prices to drop to $1,050/oz by the end of 2014, maintaining our previous forecast. Acceleration in the US economic recovery story remains the key driver behind our lower gold price forecast. While weak economic data due to cold weather and the onset of the Crimea crisis led to a sharp rally in gold prices between January and mid-March, sequentially better US activity and easing tensions pushed gold prices lower by early April. Since then, US economic releases have continued to point to acceleration in growth while tensions in Ukraine have escalated, keeping gold prices range bound near $1,300/toz.
Sure, why not.
That said, can Goldman please also advise if its suddenly very active prop group is buying or selling gold. We promise to do whatever they are doing.