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The World's Top Bank Tells Investors to Shun Gold

By Doug Ehrman - Apr 14, 2013 at 8:30AM

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The investment bank has turned negative on gold and is pushing investors to get short.

For the second time this year, Goldman Sachs slashed its forecasts for gold prices for both 2013 and 2014, adding to the pressure on gold prices lately. So far, 2013 has seen the Dow Jones Industrial Average up nearly 11%, the S&P 500 up nearly 9%, and gold prices down more than 5%. Even with the global and U.S. economies continuing to show signs of weakness, gold prices have moved very little since late 2011. Given the negative view that Goldman is taking of gold, the bank now suggests shorting the commodity. While I don't see things for gold as being quite that weak, significantly reducing your exposure to gold seems prudent.

Gold Price in US Dollars Chart

Gold Price in U.S. Dollars data by YCharts.

Goldman's case against gold
In the current round of price reductions, Goldman lowered its average price per ounce outlook for 2013 from $1,610 to $1,545. The investment bank now sees the price contracting to $1,350 in 2014, which is a significant reduction from the $1,490 price target it once held. For the rest of the year, Goldman sees plenty of negative pressure: "While there are risks for modest near-term upside to gold prices should U.S. growth continue to slow down, we see risks to current prices as increasingly skewed to the downside as we move through 2013. In fact, should our expectation for lower gold prices continue to prove correct, the fall in prices could end up being faster and larger than our forecast."

One of the potential catalysts for the above-mentioned increased decline is an accelerating deterioration in investor confidence. A great number of gold investors piled into the commodity on a speculative basis to not miss the expected move. As prices continue to stagnate and fall, investor capital is likely to look for greener pastures more and more quickly. As speculative positions are unwound and more stop-losses at triggered, the move lower could be sharp.

Spikes lower are actually a hallmark of commodities. Prices usually trend gradually higher, or even sideways, but when moves lower happen, they tend to be violent and expensive. This is one of the reasons so much risk is often associated with commodities trades -- the move lower can occur before you have a chance to get out. Owning shares of ETFs such as the SPDR Gold Trust (GLD -0.47%) can mitigate some of this risk, but large speculative positions in GLD may have contributed to gold's run, making the relative protection of the ETF somewhat diminished.

Is there safety in miners?
For an extended period, gold miners such as Barrick Gold (GOLD -2.92%) have underperformed the pure commodity play. Over the past year, Barrick is down more than 40%, while GLD is down about 7%. Over the long term, you would expect this relationship to normalize, meaning miners should outperform at some point. When this happens, however, there's no guarantee that either investment will be headed higher -- the miners may simply fall by less. The potential inflection point that gold presents might be a catalyst for a reversal for the miners, but that remains speculative. Until a shift is apparent, the miners provide no more safety than gold itself.

GLD Chart

GLD data by YCharts.

Ultimately, gold looks weak, and Goldman's added negative pressure is unlikely to help. Even if you prefer to maintain an allocation, reducing it would seem appropriate.

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