Following this morning’s flash crash in gold, in which a “fat finger” – usually a euphemism for any trade that can not be logically explained yet one which reprices a given asset class substantially lower as happened with gold – suddenly sold $2.2 billion worth of gold in under a minute, taking out the entire bidside stack, we were expecting banks to immediately come out with bearish reports on gold, piggybacking on the latest central bank-facilitiated smackdown, and allegedly allowing their prop desks to load up on the yellow metal on the cheap.
We were surprised, however, when moments ago Goldman came out with a report explaining why the bank is now bullish on gold, Further, in the note from Goldman’s x-asset strategist, the bank laid out three specific reasons why gold may trade well above the bank’s commodity team year-end target of $1,250.
This is what Goldman said moments ago:
Across asset classes last week copper was the best performing asset (+2.5%), while oil was the worst performing asset (-4.3%, Exhibit 3). Gold’s performance was flat (+0.1%) over the same period, but had an intraday min at 1.6% today. Much of the focus has obviously been on oil where concerns are that expanding supply in the US and Libya will counter OPEC cuts. Gold has received less focus, although its cross-asset correlations have quietly been rising to new extremes (Exhibit 1).
Our commodity team’s view is gold at $1250/oz over 12 months as higher real rates from Fed tightening could put further pressure on gold, but this may be offset by 3 things:
- lower returns in US equity (as we expect) should support a more defensive investor allocation,
- EM $GDP acceleration would add purchasing power to EM economies with high propensity to consume gold, and
- GS expects gold mine supply to peak in 2017.
Gold has been increasingly trading as a “risk off” asset, with its correlation with global bonds at the 100th percentile since 2002…
… and should thus be sensitive to our expectation of rising rates from here. However, with global growth momentum likely having peaked, gold could represent a good hedge for equity, in particular in currencies with low and anchored real yields.
Gold implied vol remains attractive for investors’ of either view: it trades at its 0th percentile relative to the past 10 years (Exhibit 28).
While Goldman’s arguments are sound, the fact that the bank is urging its clients to buy gold, ideally from Goldman, suggests that the selloff is most likely nowhere near done.