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Gold has had a lackluster year despite some pretty favorable conditions, and on Wednesday, Goldman Sachs called the end of the yellow metal’s decade-long rally.
But maybe you should take a page from George Costanza’s book and do the opposite the Vampire Squid says, instead taking Nomura’s advice and buying gold ahead of next week’s Federal Reserve meeting where more easing will probably be announced.
What happened to gold in 2012? With a global economic slowdown, massive money-printing from Ben Bernanke at the Fed and around the world, a European sovereign debt crisis that refuses to go away, and even a war between Israel and Palestine, the precious metal has underperformed. Gold is up only 7.8% this year, compared with a 10.2% gain for the S&P 500, for example. Maybe it’s time to call it quits. Gold has sustained a multi-year bull run that could be coming to an end, at least according to Goldman Sachs. The Wall Street powerhouse released a note on Wednesday noting the “cycle in gold prices will likely turn in 2013” as improved U.S. economic performance, and a gradual increase in real rates, outweighs coming Fed easing, according to Zerohedge.
The Vampire Squid has released its price targets for the yellow metal, forecasting it to rise to $1,825 over the next three months, then slide to $1,805 in six months, and finally to $1,800 toward the end of 2013; Goldman sees gold averaging $1,750 in 2014.
A common joke in Wall Street is that you have to look at Goldman’s client suggestions and then do the opposite. Much like George Costanza in Seinfeld, when he decides to do the opposite of what he normally does, only to find himself getting a job at the Yankees and a date, Nomura is actually suggesting that investors buy gold.
As an asset, gold has shown a pretty strong negative correlation with the value of the U.S. dollar, which in turn goes down as the Federal Reserve prints more Benjamins. Nomura’s economists believe, along with several of their colleagues, that the Bernanke Fed will replace Operation Twist (which didn’t expand the balance sheet) with more asset purchases (quantitative easing, or QE) early in 2013.
The Fed is currently buying $85 billion in Treasuries and mortgage backed securities a month, but $45 billion of those are set to end with 2012 as the Twist expires. Those $45 billion were sterilized, which means they didn’t add to the Fed’s balance sheet, but analysts now expect Bernanke to replace those with longer-term asset purchases to keep the level of acquisitions at least steady.
According to Nomura, this will happen as a consequence of a stubbornly slow increase in job growth. Indeed, this Friday markets will see the November jobs report, which is expected to show non-farm payrolls rising by 90,000 (Nomura expects a blockbuster 145,000). The Fed has made it clear that it plans to continue QE until it sees a sustained improvement in labor markets.
They also note that this is a “tactical” opportunity to buy the yellow metal, as it’s trading below $1,700. Net longs are off their highs, according to CFTC data, which means there is a good chance these buyers will jump back in to the market. Nomura also points to an acceleration in the buildup of physical gold holdings by ETF, on which I’ve reported previously. Furthermore, the fiscal cliff should be bullish for the yellow metal, as it was in the summer of 2011 during the debt ceiling debate which saw gold rally.
Beyond the Goldman – Nomura faceoff, investors should also take into account the gold miners. Despite impressive gains in gold prices over the last few years, major players like Barrick Gold, Newmont Mining, and Goldcorp have underperformed. While some have pointed at rising costs, others note that the miners actually provide dividends, which bullion doesn’t. If gold prices continue to rise, it should be, on the face of it, bullish for the miners.
Whatever the best option is, both Nomura and Goldman actually agree the yellow metal is set to go up in the short-run. As a trader, it may be an opportunity, as a long-term investor, it may not. Unless, of course, you’re George Costanza.
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