Gold is falling due to fears that Cyprus will sell its gold according to a new report from Goldman Sachs. Cyprus only holds 13.9 tons (or $500 million), which would explain little for the one trillion decline in the price of gold. However, Goldman believes that the selling could trigger sales from other Central banks. Goldman fails to mention their short recommendation on the metal as a reason for the sell-off, nor did they mention Cyprus in their initial report recommending a short. The reasoning behind the Banking giant’s recommendation makes little sense to this author, but readers could decide on their own. Below is a brief explanation from Goldman as well followed by the full report in PDF format.
Commodity sell-off broadens, stopping us out of our CCB trade The sharp sell-off in gold was triggered by growing fears that the central bank of Cyprus would sell its gold reserves, potentially reflecting a larger monetization of gold reserves across other European central banks. The decline in prices was exacerbated by the breach of key technical price support level at $1,530/toz and then at the $1,434/toz 200-week moving average, creating the largest one day decline.
Spillover from gold and renewed European and EM macroeconomic concerns also created sharp sell-offs in crude oil and base metals, that were mostly front-end driven, crushing spreads (the carry), as longer-dated prices remained remarkably stable.
This stopped us out of our CCB (Commodity Carry Basket) recommendation with the potential loss reaching our 6.0% stop. Slide in ETF holdings accelerates, suggesting more gold downside Although gold has now traded below the $1,450/toz target embedded in our short recommendation, we are maintaining our short as we argued last week that prices could decline more than we initially thought as positioning is stretched and the momentum is to the downside. The most recent ETF holdings showed acceleration in the liquidation of length, which points to a broad-based sell-off extending beyond the futures markets with potentially more room to go. As a result, we are now lowering the stop to $1,400/toz (which locks in a potential gain of 12%) while we wait for evidence of a bottom, though we are not changing our price forecasts now.
We believe base metals are closer to a bottom than oil
Although we maintain our bullish 3-month targets on oil and copper, the base metals complex is likely closer to a bottom than oil, which is why we exited our long oil recommendation yesterday but maintain our long copper view with conviction. Metal prices have fallen to the point that they (price declines) are beginning to generate significant micro adjustments in fundamentals to support higher prices. Unlike in oil where nearly all the markets are in contango, in copper the Shanghai market is backwardated, the Shanghai-LME arbitrage window is open and Shanghai exchange and bonded warehouse inventories are declining.
In oil we believe that the market will need to see evidence that the recent product weakness is created by an exaggerated seasonal swing and not a deeper underlying economic weakness before it can rally again.