Goldman Sachs: This Could Send Gold Prices Plunging

Gold PricesIs gold’s recent rally about to come to an end? Analysts from Goldman Sachs Group seem to think so. In a report dated February 15, analysts Jeffrey Currie and Max Layton said it’s time to bet against the commodity, as the recent rise in gold prices isn’t justified. Gold prices are touching their highest level in about a year, rising approximately 13.5% year-to-date.

The analysts’ report, entitled “Nothing to Fear But Fear Itself,” is a nod to President Franklin D. Roosevelt’s 1933 inaugural speech, when the U.S. economy was going through the Great Depression.

Financial markets, the analysts noted, have overreacted to the current economic environment. Once reality sets into the markets, gold prices will retreat from their recent gains, the analysts said. (Source: “Goldman Sachs: Short gold on market ‘overreaction’,” CNBC, February 2, 2016.)

The analysts also noted that they only see a 15%–20% chance of a U.S. recession in the short-term.

Gold is traditionally seen as a safe-haven asset. Investors have flocked to gold in the current economic environment on fears of slowing growth in China and falling oil prices.

“We believe that these new fears, like past fears, are not justified,” the analysts wrote. “Systemic risks stemming from the collapse in oil and commodity prices are extremely small.” (Source: “Goldman Channel FDR’s ‘Nothing to Fear’ With Sell Gold Call,” Bloomberg, February 15, 2016.)

The analysts forecast that gold will drop to about $1,100 an ounce in three months and $1,000 an ounce in 12 months as the result of rising U.S. interest rates and recommended shorting the commodity. (Source: “Goldman Sachs: Short gold on market ‘overreaction’,” CNBC, February 2, 2016.)

So how can investors take advantage of a possible decline in gold prices?

“We are recommending shorting gold through a GSCI-style [Goldman Sachs Commodity Index] rolling index,” the analysts advised. (Source: Ibid.)