Goldman Tells Clients To Buy COMEX Gold At $1,364.2, Raises 12 Month Gold Forecast From $1,365 To $1,650, Silver To $27.60

Tyler Durden's picture

Alarm bells are ringing everywhere as Goldman (which joins UniCredit in boosting its gold price target) may have just picked the short-term top in gold, after it revised its 12 month target from $1,365 to $1,650. And while David Greely's track record is nowhere near as atrocious as that of Goldman's FX team which manages to top tick the EURUSD every single time, the fact that Goldman is now opening Long Gold recommendations (to go with its current trading recommendations of long Corn, Copper, Platinum and WTI) is reason for big worry. Recall which bank was getting its clients to go all in in crude 2008 when oil was $140+. We would be very cautious when Goldman is on "your" side of the trade. Nonetheless, the firm is pretty much spot on "We believe that a return to quantitative easing will act as a strong catalyst to carry gold prices to even higher levels."

Here is Goldman's full revised target. Compare this to the most recent 12 month gold target by Greenlaw from August of $1,365.

And here is Goldman's extended thesis on gold, which is a simple one, and fundamentally identical to what we have been saying for years: buy gold until the Fed begins to tighten. Which means forever and never.

Gold rally to continue, for an extended period

Gold prices have rallied strongly since early August. The rally began as net speculative long positions rebounded from what we argued were oversold levels (see Precious Metals Update: Gold market poised for a rally as US real rates head lower, August 11, 2010). The initial rebound, however, extended into a new rally as 10-year US TIPS yields plummeted with the growing prospect of another round of quantitative easing by the US Federal Reserve, sending the price of gold through our $1,300/toz 6-month price target and to new record nominal highs above $1,350/toz, just shy of our $1,365/toz 12-month target (Exhibit 1).

US real interest rates have fallen with the slowdown in the pace of the US economic recovery and the growing prospect of another round of quantitative easing. With TIPS yields now closer to 0.50% then the 1.00% embedded in our prior forecast, we expect gold prices to continue to climb (Exhibit 2). Despite the rebound in net speculative length, it remains well-below levels consistent with the current low US real interest rate environment.

We expect positions to continue to climb with quantitative easing a catalyst to lift positions and prices higher. Accordingly, we are now raising our gold price forecasts to $1,400/toz, $1,525/toz, and $1,650/toz on a 3, 6, and 12 month horizon, respectively. This raises our 2011 average gold price forecast to $1,575/toz, $175/toz higher than previously. We are also opening a trading recommendation for a long position in the Dec-11 COMEX Gold contract.

While we view the level of US real interest rates as the primary driver of gold prices in the current environment, stronger monetary demand for gold from both gold-ETFs and central banks than we currently expect creates upside risk to our gold forecast. In particular, gold- ETF holdings have been quite stable in recent months, suggesting that gold prices could move even faster to our year-end target should ETF buying return following the new record highs in gold prices and the announcement of quantitative easing, which our US economics team expects to occur as early as the November FOMC meeting.

Speculative positions rebound from oversold levels, but continue to chase falling US real interest rates

Gold prices have rallied strongly since early August, trading through our 6-month $1,300/toz price target and setting new nominal highs above $1,350/toz. The first leg of this rally took place in August with prices returning to their June $1,260/toz highs on the back of a strong recovery in COMEX net speculative length from what we argued were oversold levels (see Precious Metals Update: Gold market poised for a rally as US real rates head lower, August 11, 2010). Speculative long positions tend to move inversely with US real interest rates (see Exhibit 3), with more speculative length translating lower US real interest rates into higher gold prices. As of early August however, there had been a large disconnect between the light COMEX net speculative positioning and low US real rates.

Specifically, net speculative length had declined to near year-to-date lows just as US real rates, as measured by the 10-year US TIPS, dropped to a decade low 1% (Exhibit 4). As we argued then, the real rate to net speculative positioning relationship suggested that a correction would increase net speculative length by 9 million toz. This move has mostly taken place.

However, even as speculative longs were moving back in line with low US real interest rates, US real interest rates began to plummet with the growing prospect of another round of quantitative easing by the US Federal Reserve. After gold prices stalled at their June highs, the break to the upside came on September 13 amid a heightened market focus on the potential for a return to quantitative easing, with US 10-year Treasury and TIPS yields falling, and the US dollar declining against the euro. Gold prices were further propelled to their current new highs after the US Federal Reserve signaled in the September FOMC statement that it was willing to ease further. However, as US real interest rates have fallen, the increased in net speculative length in COMEX gold futures has lagged behind, and is well-below levels consistent with the current low real rate environment, pointing to further upside to gold prices.

Specifically, the recent real rate to net speculative positioning relationship would suggest that the current 0.50% US 10-yr TIPS yield should push net speculative length to a record 37 million toz. Historically, a 1 million toz increase in COMEX gold futures long positions translates into a 0.87% near-term increase in gold price (see our report Commodities: Frameworks: Forecasting gold as a commodity, March 25, 2009 for details). This implies that this 7 million toz increase from last Wednesday levels would point to a 6.1% rally in gold prices, all else constant, taking current prices to new highs of $1,425/toz, pointing to further near-term support to gold prices (Exhibit 5).

While the recent decline in US real rates suggests further upside to gold prices in the near term, our US economic outlooks suggests that US real interest rates will stay lower for longer and support a continuing rally in gold prices.

Our US economic outlook suggests US real interest rates will stay lower for longer with renewed quantitative easing an effective catalyst to carry gold prices higher We had previously based our outlook for gold prices on the expectation that US real rates would remain in a 1% to 1.5% range; however, the recent deterioration in the US economic outlook and the prospect for renewed quantitative easing has brought 10-year TIPS yields below 0.50%. Our US economist and fixed income strategist outlooks suggest that these levels are sustainable and we expect this to support COMEX gold net spec positions at significantly higher levels and in turn push USD-denominated gold prices significantly higher.

Specifically, the key driver of the sharp decline in US real rates has first been the re-pricing lower of US growth expectations as the economic recovery has lost a considerable amount of its momentum. Our US economists forecast the significant slowing in US growth in 2H10 to extend in 2011 and, in turn, our fixed income analysts see 2.50%-2.75% as the new likely yield range for 10-year US Treasuries into 2011. Our US economics team also expects that the Fed will return to quantitative easing measures with purchases of US Treasury securities of $1 trillion which in turn should likely keep US bond yields depressed. They further expect that such a program will be announced at the November 2-3 FOMC meeting. The growing likelihood of such a move has been the key catalyst to push US real rates sharply lower since early September. We believe that a return to quantitative easing will act as a strong catalyst to carry gold prices to even higher levels.

These outlooks suggest that the current low US real rate environment will persist and in turn support gold price. At current US TIPS yields of 0.50% and in the absence of net buying or selling from gold-ETFs and central banks, our gold framework points to average gold prices of $1,600/toz (see Exhibit 6). We expect further monetary demand for gold and are accordingly raising our COMEX gold price forecast higher to $1,400/toz, $1,525/toz, and $1,650/toz on a 3, 6, and 12 month horizon, from $1,260/toz, $1,300/toz and $1,365/toz respectively. Our updated forecast points to a $1,575/toz average price in 2011, $175/toz higher than we previously expected. We are also opening a trading recommendation for a long position in the Dec-11 COMEX Gold contract.

Longer term, we continue to expect that prices will come under downward pressure once the US economy strengthens and the US Federal Reserve begins to tighten monetary policy. As discussed by our US economists, models suggest that it might in fact take until 2015 or longer before a rate hike became appropriate although they emphasize that this is a scenario, not a formal forecast (see US Views: Sealing the Case, October 11, 2010). While they do not expect tightening to happen before 2012 at the earliest, we view an earlier than- expected tightening of US monetary policy as the primary downside risk to our gold price forecasts. Specifically, our modeling of gold prices against real rates suggests that a recovery of US real rates to 1.5% would bring gold prices down to $1,220/toz over the medium term.

 

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Cookie's picture

Haha...buy Comex!!!

perchprism's picture

 

This comes just as the Vice Chair of the Fed lowers expections of QE2:

http://news.yahoo.com/s/ap/20101012/ap_on_bi_ge/world_markets_12

midtowng's picture

I remember an article from several years ago. It pointed out that the best time to buy gold is when real interest rates turn negative. I believe that is where TIPS are currently.

dlmaniac's picture

hmmm, 1650. Did they copy it from Jim Sinclair?

Thunder Dome's picture

No, Goldman bets big using Armstrong's numbers.  Next May, market is in for horror show.

Turd Ferguson's picture

Just for fun...here's another top-caller who has been left for dead. Btw, what kind of idiot calls for a "triple top"? There is no such recognized technical formation. Note the date, too:

http://www.minyanville.com/businessmarkets/articles/precious-metals-prec...

Hephasteus's picture

Goddamn. WTF was that? Now I understand astrologers that just babble shit to pictures calling it analysis.

ssp2s's picture

Afraid so.  Or at least go neutral.

This tells me that QE2 may not be a done deal.

LowProfile's picture

Agreed.

I think this is a pump for paper gold, prior to a dump of paper gold and equities.

This does two things, it gives Wall St. Corp yet another chance to suck even more money out of the middle class, and will drive many into bonds (the last bubble).

My analyisis puts gold at $1264.00 on a pullback.

Buy physical with both hands once it hits.

tmosley's picture

Short COMEX and/or GLD, long physical gold.

Hedged bet on default.  

e_goldstein's picture

short paper gold, or as I like to refer to it: "gold."

Turd Ferguson's picture

I may be "whistling past the graveyard" but GS may not have any luck top-calling gold at this moment in time.

Recall that on Thursday of last week, the Evil Empire succeeded in painting the tape with an outside downward reversal day. This is significant if gold either moves through and/or closes below the low of that day which was 1326. They have tried twice to get the avalanche rolling, the latest being overnight last night. By the way, if anyone still doubts the malicious presence of the EE, see the price action since 6:00 EDT yesterday for proof. (The EE tried to jam it down Sunday night before taking Monday off. Gold rallies all day Monday. As soon as gold re-opens at 6:00, down she goes.)

At any rate, our new best friends, the buyer(s) of size, continue to appear and buy dips at what appear to be pre-determined levels. Yesterday was 1335. Today was 1340. You can plainly see it on the chart. This has to be seriously pissing off the EE. Never, ever have they been unable to control the gold market in the past. Never. Yet now, they seem to have met their match in a determined group of buyers who are calling their paper bluff. Truly an amazing thing to behold.

OK, what's next? If the EE can succeed in driving price down through the lows of last Thursday, they will generate more selling from weak-handed, momentum-based longs. Expect 1275-80 by late week or early next week. The EE will, most likely, not be able to accomplish this without the cooperation of a dollar rally so, amazingly, this is not the most likely scenario. Instead and conversely, if gold can trade up through the highs of last Thursday at 1366, it will have begun to negate the outside reversal day damage. If/when gold closes above 1366, we will be off to the race once again with 1400 squarely in our sights.

The key to this may, in fact, be silver. As I've mentioned (ad nauseam?) for some time now, the silver Comex appears to be in serious crisis. Silver has rallied from 18 to 23 over the past 6 weeks and it is bringing gold along with it because "if the silver Comex is out of gold, the gold Comex must be a charade, too". The weekly close, back on Friday, above 23 is extremely bullish. On the chart, there is nothing overhead until $35 or so. We may see silver rapidly accelerate to the upside in the coming weeks. If so, no amount of EE price-capping will be able to contain gold.

Again (ad nauseam), I've maintained for months that gold would trade at 1350 by Halloween and 1500 by 12/10/10. Nothing, so far, has caused me to change my mind.

LowProfile's picture

We already hit $1350.  I'm expecting a pullback to $1264.  Buy with both hands when it hits.

SwapThis's picture

well said Turd.  It may be that EE will use INTC & JPM earnings spin as a good inflection point to try to 'risk off' the market, at least temporarily. If Jamie doesn't have a good answer to the foreclosure flap all the Big Cap banks could founder on tomorrows JPM conference call word as has happened in the past.  Also, INTC tends to sell off post earnings, which they have pre-announced would be soft.  Also the DXY is stronger today which may be the EE beginning to apply the brakes....for now.

Slewburger's picture

Is GS trying to pull money into the CMX silver before they know it will pop?

The shorts have been unwinding and covering since the Maguire scandal, so what gives? The paper fraud probably won't be covered by the MSM and it will happen after the PM bubble bursts.

SRV - ES339's picture

EE... love the handle Turd!

I'm with you on the EE / market struggles... with the market seeming to get the upper hand since the Maguire revelations (funny how cold that story got... not a word since May... I guess Andrew decided to continue breathing for a few more years) 

Question... do you see any tie to pre T-Bill auction activity (raid gold price to drive funds into bonds... of course, stocks get choppy as well, but that's just hitting HAL's sell button a few hours a day)? Example... the last few days gold price activity prior to this weeks auctions.

Turd Ferguson's picture

Interesting thought, SRV.

If you pull up a chart of gold dating back to the end of the most recent correction in July, you'll plainly see that about 80% of the $200 or so gain since can be attributed to price action on Mondays and Tuesdays. I find this somewhat strange and I can't seem to get a handle as to why this is occurring. Maybe later week auctions are soaking up $? I dunno. Have to look into that one.

beastie's picture

Aw crap! price will collapse tomorrow.

 

umop episdn's picture

I'm thinking along these lines too. Glodman gets it's customers to buy, then massive short selling of paper gold by Glodman's friends takes the price down, which causes some to sell. Then the squid buys back the paper (and the physical if they can) and the price of Au and Ag continue to climb.

Internet Tough Guy's picture

A disgusting tentacular display. This cephalopod speaks with forked beak.

French Frog's picture

when qe2 fails to materialise as much as expected and the price goes down, gs can just blame it on the fed

ATG's picture

Bingo.

Wasn't GS propping $300 oil in 2008?

mrgneiss's picture

They're also urging miners to hedge for 2012.  Isn't that kind of them.  I guess 2012 is when PM's go parabolic.

Silverhog's picture

Buy Comex? Yeah if they have a physical shop.  I don't think so

scratch_and_sniff's picture

i'm still not 100% sure that the dredful reserve will go all-in, this could drag on for ages...i'm not holding any gold at the minute, so on the fence with respect to the bling. Its broken my heart to be honest.

firstdivision's picture

Time to short it once Goldman raises their price target.  "Goldman, the best contrarian indicator money can buy".

Dagny Taggart's picture

...but this time its different. Hahaha, I know.... but trying to figure if Lloyd is pulling a Bennie is tricky stuff. Head fake? This is akin to a really bad made for TV whodunnit. What if GS knows gold is about to shoot for the moon and needs to say it told the clients and the White House? Does anyone still work at the White House?

 

gmrpeabody's picture

Agreed, this is win-win for GS.

Look, we gave our customers a heads up. We can't help it that the FED failed on their end.

DosZap's picture

No just wait staff, the only one's working at the WH is PoUS, and he works for the Big 4 Banks.

Dagny Taggart's picture

Right? Can you see Michelle O, plopped on the floor, counting the silver after summers and rahm left?

Bruce Krasting's picture

Who knows where gold will be in a year? I could give you a scenario that it could be $5,000. I could also make you a case for 800.

I think GS is on the right track. A year from now gold will be higher. But it sure scares me when these guys are the ones pushing the "buy" talk. They ALWAYS have an axe to grind....

tmosley's picture

I can make a case for Gold $800.  The Fed calls the currency and reissues one with three zeros chopped off.

DosZap's picture

Bruce,

They are close to Jim Sinclair, he has a million dollar bet it hit's $1650.00 by Jan 2011.

Which I am sure you know about.

How do you make a case for $800.00 in a year, with what we have coming at us, with no way to derail it?.

VWbug's picture

he doesn't 'have a bet'   he has a publicity stunt.

as soon as anyone steps up to take the other side he will come up with a million excuses why he can't do it.

 

Ace Ventura's picture

I may be misinformed, but I seem to recall the bet has indeed been formally taken? Supposedly some hedge fund agreed to the terms and the wager funds are being held by a third party.

I'm not 100% positive, but maybe some of the diehard Sinclair readers might have official info on this?

VWbug's picture

hey you could be right, i said somewhere else here that every trader in the world would take him up on the offer.

here's my bet:

They can't come to terms, and it will be Sinclair that walks away.

Second bet: The hedge fund does not lose money, even if the prediction is correct, (unless Sinclair welches on the bet of course.)

 

trillion_dollar_deficit's picture

If they can forecast ZIRP to 2015, then where's the forecast for gold in 2015?

rolo's picture

Typical - just when i thought we might get a nice move, GS and the rest of the banks start upgrading their price targets!

Oh well, I guess there is the possibility that they might actually be correct this time.

system failure's picture

Keep your physical gold and silver and sell any and all paper gold and silver now is the correct interpretation of GOLDMAN SUCKS conviction buy!!!!!!!!

VWbug's picture

but i thought GS was part of the giant conspiracy?

You know, the one to manipulate gold prices lower to protect somebody's short position (why they wouldn't just cover it is beyond me, that would be a lot easier).

Damn, now I have to rethink everything! Just when I thought the giant squid was running everything.

system failure's picture

JPM Chase took over Bear Sterns GOLD/SILVER manipulation, Goldman Sucks just front runs the work of JPM/Fed.

VWbug's picture

ooohhh   so JPM is behind everything? Now I get it.

But didn't GS get the memo from JPM and the fed?

I thought all the CBrs were GS alumni?

And why doesn't JPM just cover their short position, it'd be so easy, I mean it can't be very big as gold is so under-owned  right?

 

lsbumblebee's picture

"And don't forget everybody...make sure you buy paper gold."

-David Greely

CashCowEquity's picture

Goldman is for fruits. BOHICA !

 

Gold wins !!!

SIlver not bad either !!!

 

I own both PHYSICALLY !!!, Woo HOO Bitchez !!

ArrestBobRubin's picture

Hey, even a broken clock is right twice a day... But I do think the squid has this one right. They are in very good company in making this call but are playing it on the conservative side compared to many other price targets.

 

Alex Lionson's picture

Would be nice to hear what JPM or HSBC are saying in this regard

Ripped Chunk's picture

GS discussed it with them over the weekend.