It should surprise no one that the megabank Goldman Sachs (GS) is bearish on gold. This has been a common theme for commodities analysts at Goldman. Earlier this year, the bank called for the gold rally to fizzle out and prices for the yellow metal to fall back toward $1,000/oz. Even after gold’s unbelievable performance through the first quarter, the bank has stuck by this prediction.
In other words, Goldman Sachs is a permanent gold bear—a “permabear,” if you will.
Goldman Sachs’ Dubious Reputation
As usual, there’s one big catch to Goldman Sachs’ prediction regarding gold. Dating back to the financial crisis, Goldman (not unlike many of its peers in the financial services industry) has developed a reputation for playing the opposite side of the advice it gives to its clients and other investors. When they make a call to short a particular company, the bank itself will often go long on that stock! When GS advises that investors should jump into a specific sector, the bank’s finance department will frequently be aggressively selling out of that sector.
This is clear evidence of a dishonest game of cat and mouse being played. Although Goldman is not the only bank who is guilty of this tactic, it is perhaps the most notorious culprit. If you’re still unsure about Goldman Sachs’ trustworthiness and integrity, consider that the company just settled a case with the Justice Department over defrauding its clients with mortgage-backed securities for more than $5 billion.
Fear Driving Safe Haven Flight
Some observers have recently taken to pointing toward more subdued volatility in the financial markets as a sign that investors (at least the largest ones) are becoming more comfortable with the current economic outlook. Less volatility implies smoother sailing ahead, they claim.
However, an alternative measure of market anxiety paints a different picture. The Credit Suisse Fear Barometer, which is basically a measure of the price spread between puts (short options) and calls (long options) on the benchmark S&P 500 index, just hit an all-time high. This means it’s never been more expensive to bet that stocks are going higher compared to how much you can speculate on the market falling for the same price.
This tells us that market participants are far more convinced that equities are going to fall in the near future as opposed to rise. According to analyst Mandy Xu from Credit Suisse, “The derivatives market is assigning less than 1 percent probability the market will rise by 10 percent in the next three months vs. 17 percent probability it will fall by 10 percent.” Keep in mind that a 10% quarterly jump is undoubtedly a huge move.
Gold is the ideal safe haven in such times of fear and anxiety. Even with all of this worried sentiment abounding, Goldman Sachs maintains its negative position on the yellow metal. Jeff Currie, the firm’s head of commodities, is still advising that investors short gold. Yet, his rationale for this position is rather hollow: the Fed is going to raise interest rates, and this is bad for an asset that bears no yield such as gold.
There are two holes in this logic. First, it’s hardly a certainty that the Fed will aggressively raise rates. It has already cut its outlook from four quarter-point rate hikes this year to just two, and most observers even find this a bit ambitious. Second, even if the Federal Reserve does indeed raise rates, most of the developed world will still be sporting subzero interest rates, so this seems like a hasty and threadbare conclusion.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.