Hedge Fund Gold and Silver Positions

Gold not long ago was the hottest investment among analysts, hedge funds, amateur trades, and Mrs. watanabe. Since the time when we (sorta) called the top (and we are not market timers) in the precious metal, many have learned the hard way that all that glitters is not gold. Over the past six months, the ETF for once favorite precious metal ((SPDR Gold Trust NYSEARCA: GLD)) is down over 10%. Now as, the price is dropping analysts like lemmings are hitting the sell button (or at least telling their clients to). Although, the conspiratorial amongst gold bugs may cite ‘market manipulation‘ for the decrease in price, we think its plain old contrarian thinking at play.

Goldman Sachs is now recommending  a short in Comex gold. Goldman notes that part of the reason for the downgrade is ‘recent lackluster price action’, making the call seem more emotional than fact basted. Below we present Goldman’s entire thesis without commentary.

GS Turn in gold cycle accelerating positioning for lower prices

Gold unfazed by Cyprus, recent slowdown in US recovery

Over the past month, events in Cyprus have triggered a resurgence in Euro area risk aversion while US economic data has started to disappoint. Remarkably, gold prices are unchanged over that period, despite US 10- year TIPS yields back at their lowest level since late 2012, highlighting how conviction in holding gold is quickly waning. This is particularly visible at the ETF level with gold holdings continuing to decline quickly. Importantly, our economists expect that ramifications from Cyprus will be contained and that the recent US slowdown, so far consistent with their forecast, will not derail the faster recovery they expect in 2H13. Net, a large rebound in gold prices is unlikely barring an unexpected sharp turn in the US recovery.

Turn in gold prices accelerating; closing our long gold position

Given gold’s recent lackluster price action and our economists’ expectation that the acceleration in US growth later this year to above-trend pace will support US real rates, we are lowering our USD-denominated gold price
forecast once again. Our new forecast is further below the forward curve with year-end targets of $1,450/toz in 2013 and $1,270/toz in 2014. As a result, we recommend closing the long COMEX gold position that we first
initiated on October 11, 2010 for a potential gain of $219/toz, with the risk reversal overlay expired on March 25. Our long-term gold price forecast (2017+) remains at $1,200/toz: while higher inflation may be the catalyst for the next gold cycle, this is likely several years away.

Initiating a short COMEX gold position as our ECS Top Trade #8

While there are risks for modest near-term upside to gold prices should US growth continue to slow down, we see risks to current prices as 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, as aggregate speculative net long positions across COMEX futures and gold ETFs remain near record highs.

We therefore recommend initiating a short COMEX gold position as our ECS Top Trade #8, implemented through an S&P GSCI® front-month rolling index to further benefit from the contango in the COMEX future curve, targeting a move to $1,450/toz with a stop at $1,650/toz. While we may be end up too early in entering this trade, we prefer that to being late given our belief that the skew to current prices is to the downside.