Sunday, August 15, 2010

Be Very Wary - Goldman Sachs Is Bullish on Gold

You have to doubt your own eyes, your own sanity, when you encounter a paper that seems to agree with your investment or trade stance and that paper was written by Goldman Sachs, the firm known to bet against its own clients, and most recently, the firm who practically called a bottom on Euro in early June with the target of 1.15 when Euro was trading near 1.18 against US dollar.

I've read the paper below, which appeared on Zero Hedge on August 11, 2010. My first reaction was a dread: Oh no!!! Goldman Sachs is one of the bullion banks active in the COMEX along with the likes of J.P. Morgan Chase and Deutsche Bank. These bullion banks have been suspected and accused of shorting and naked shorting gold and silver to artificially suppress the price of gold and silver.

Now Goldman Sachs is bullish on gold?? Has it just called the top for gold?

The scary thing is that the paper makes sense to me. In summary, the two analysts who wrote the paper (David Greely and Damien Courvalin) say:

  1. There is an inverse correlation between the US real interest rate (they use the 10-year TIPS rate as proxy) and the gold speculative long positions: the lower the real interest rate, the higher the gold speculative longs.
  2. Since the sell-off of the gold speculative longs in June, there's a divergence between the two.
  3. The divergence will be resolved, sooner or later, with the gold speculative long positions catching up with the inverse US real interest rate.
  4. Since there is a positive correlation between the gold price and the gold speculative long positions, the gold price will rise as the gold speculative long positions rise.

They believe that the Federal Reserve will keep the interest rates low (the fed funds rate has been effectively zero) through the quantitative easing until sometime in 2012. Their target for gold is $1,300 within 6 months, though their trade recommendation is to go long the platinum futures.

Goldman Gold


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