U.S. stocks are lower this morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (^DJI 1.18%) down 0.05% and 0.04%, respectively, at 10:15 a.m. EDT. The SPDR Gold Shares (GLD -0.08%), on the other hand, is up 0.62%, with gold futures breaking $1,350 for the first time since October.
Last year was a disastrous year for the "disaster trade" -- that being long gold -- as the price of the yellow metal lost 27%, its worst annual performance in more than three decades. But the magnitude of that decline may have set the conditions for 2014's reversal, which has gold off to its best start in six years.
One of the factors behind last year's slump was a dumping by hedge funds and other investors of gold's most liquid incarnation: gold exchange-traded products, including the largest and most popular, the SPDR Gold Shares. However, according to official data, hedge funds and other speculative interests have now increased their long positions in New York gold futures for the fourth consecutive week, such that the open interest is more bullish than it has been at any time since December 2012. Similarly, last month, the SPDR Gold Shares recorded its first monthly inflow since December 2012.
In that context, it's no wonder that Nomura published a positive note last week declaring that "like a phoenix regenerating from its ashes, cyclical gold appears set to recover," noting that "many of the variables that drive gold prices have already reset to an extent":
ETF and COMEX positioning no longer appear to pose the same threat to prices as in 2013. Gold producers have delayed the next phase of growth projects as they work to protect balance sheets.
As such, Nomura now sees gold at $1,335 this year and $1,460 next year -- a substantial increase from its prior forecasts of $1,138 and $1,200, respectively.
Goldman Sachs' head of commodities research, Jeffrey Currie, however, isn't impressed. In an interview with Bloomberg, he said the situation in Ukraine hasn't altered Goldman's bearish stance on gold, nor has recent weak U.S. economic data, which is likely to be weather-related and not a "real deterioration." He added that lower mining costs now mean it's more probable now than it was six months ago that the price of gold will drop below $1,000 for the first time since 2009 (miners' cost to extract gold is thought to be a floor on the price).
Who's right -- Nomura or Goldman? Both, potentially. Note that Nomura specifically refers to "cyclical gold"; it's entirely possible that the metal could enjoy a short-term cyclical recovery from last year's savage loss. However, over a longer time period (i.e., the next several years), the outlook for the factors that drive gold prices suggest lower prices could well be on the horizon. The global economy is on the mend and real interest rates will increase. At $1,350, gold remains hugely above its long-term inflation-adjusted average price (which is below $1,000). Gold investors shouldn't ignore the potential for substantial further losses.
