What Goldbugs Have Been Waiting For: Goldman’s New Primer On Gold

The good news is that Goldman believes “precious metals remain a relevant asset class in modern portfolios, despite their lack of yield” and disagrees with Ben Bernanke and the naysayers “They are neither a historic accident or a relic. Indeed, by looking at each of the physical properties of an ideal long-term store of value…we can clearly see why precious metals were initially adopted and why they remain relevant today.”

It was sounding really good – and there was 91 pages to go - although when it came to the drivers of precious metal prices, Goldman did not exactly re-invent the wheel “We see two key drivers of the precious metals markets: Fear and Wealth”

That said, there was a new take on what, in Goldman's eyes constitutes fear as “in our new framework we see a closer link to growth expectations. However, we ?nd that many risk factors are relevant, depending on the sub-component of gold demand: real interest rates, debasement risks, sovereign balance sheet risks, geopolitical risks and other market tail-risks. Stated more simply, we are talking about the drivers of “risk-on”/”risk-off” behavior in markets.”

On the wealth angle, the good news for gold was that “as economies grow, they tend to go through a rapid gold accumulation phase at around per capita GDP of $20,000-$30,000, following a ‘hump-shaped’ relationship between per capita income and gold demand. As more EM economies (including China) are set to grow to these income levels over the next few decades.” 

As in-depth students of gold market research, our mood was lifted by some genuinely original research. Goldman found that the ratio between gold purchases and household savings (global we assume) has been broadly stable at around 1.7% for almost 40 years. Who knew that.

Goldman approximates the gold supply available for households to purchase as new mine supply plus net central bank sales. It goes on to use some simple maths “we can view the equilibrium 1 .7% share of savings allocated to gold (?*) through the following relationship, where the equilibrium real gold price is p*, the amount of household savings is Y , and the supply of gold available to households (de?ned as mine supply plus central bank net sales) is S.”

Solving the equation for the real price of gold suggests that gold is positively correlated with savings and negatively correlated with the value of mine supply and net central bank selling. Yet again, it’s not a surprise, but we were surprised by the closeness of the fit with the real price of gold since 1980 (left hand chart).

Goldman’s analysts tweak the model to improve the fit from fear variables, principally “risk-off” periods when there are portfolio reallocations from equities to gold “We see large and persistent deviations from the long-run equilibrium allocation to gold, driven by ‘risk-on’/’risk-off’ episodes. While the forces driving risk sentiment can shift over time, they are nearly always highly cyclical in nature. Growth expectations and the business cycle are therefore key variables, being negatively correlated to gold demand.”

We are pleased – in the current environment of central bank bubbles – that the establishment’s favourite investment bank emphasised gold’s role as a hedge to systemic tail risk, which is precisely what got most of us interested in gold more than a decade ago. To wit “Gold tends to preserve its real purchasing power over the very long run (albeit with substantial short-term deviations). Since Roman times, the real value of gold has remained more or less unchanged in the face of wars and political, social and technological shocks. Many investors therefore see gold as a way to hedge against structural tail risks, which could potentially erase the real value of all other ?nancial assets…Throughout history, governments have run de?cits and built large levels of debt. Having accumulated a large stock of debt, governments must either pursue austerity, ?nd a way to boost growth, or engineer in?ation (‘print money’) to erode the real value of their debt. Historically, governments often chose money expansion over austerity. Gold has traditionally been in competition with government paper currencies. When there is loss of credibility in the central bank/government’s ability to meet their liability of maintaining the real purchasing power of their currency, gold demand tends to go up. Normally, this happens when the government does a large monetary expansion, which the public fears could lead to currency debasement.”

The report goes on to compare gold and cryptos, asking if cryptocurrencies are the “new gold” and concluding “We think not, gold wins out over cryptocurrencies in a majority of the key characteristics of money.” Briefly, Goldman argues that gold is not subject to competition from alternatives (ignoring silver and cryptos, of course), holding its purchasing power (although cryptos are untested) and much lower daily volatility. It finds that cryptos (on the basis of Bitcoin) are vulnerable to hacking, regulatory risk, network and infrastructure risk, while being superior in terms of portability and divisibility.

The Goldman report touches on one critical feature of the gold market, but only barely, noting that “Investors have become more conscious of the physical vs. futures market distinction in the post-2008 crisis period. As such, the fear drivers have likely tilted demand more in favor of physical gold (or physically-backed ETFs) as a hedge against black-swan events vs. using futures.”

We apologise if we are getting a bit “picky” (not for “serious Goldbugs” perhaps), but Goldman doesn’t address the fact that the global gold market, including the LBMA (over 95% of the trading in unallocated “paper gold”), is a fractional reserve system, in which the ratio of paper to physical was estimated by the Reserve Bank of India at 92:1.

We would also have liked to see the discussion of issues such as

  1. Repeating daily trading patterns which seem to be driven by computer algorithms.
  2. The near-lock step movement of the gold price and the Yen since the Fed and the BoJ expanded QE in late-2012.
  3. Frequent intra-day waterfall declines in the gold price where large volumes of futures contracts are “dumped”, without any attempt to maximise the selling price.
  4. The role of the Bank for International Settlements in the gold market and opaque central bank lending policies of physical metal.
  5. The volume of LGD bars in London vaults (excluding official holdings and known physically-backed ETFs) which is the “float” backing the massive LBMA trade.

These omissions tainted a generally positive view of a report in which Goldman turned surprisingly bullish on gold.


YUNOSELL Tue, 10/17/2017 - 21:51 Permalink

Ah Goldman using reverse psychology again knowing everyone hates them so promoting anti-establishment investments like gold and Bitcoin -- bless their heart

BobEore abyssinian Tue, 10/17/2017 - 22:51 Permalink

Bring out your dead... bring out your dead! So the call went, as the carts went round the city to pick up the latest victims of the Black Plague.

And so it goes - in GOLDBURG - as the many victims of the (latest)longstanding scam... \\whereby innocent investors were inveigled into the age ol game of betting against the house -

a fine melange of 'investment banks,' sovereign entities, mysterious international finance capital players... all united in a common aim - to strip the west of wealth and power, and set up new HQ for a pirate empire... somewheres east of Mandalay.

GOLDMAN SACHS = conveniently playing the role of BEAST in this theatrical production... goes bullish on bullion? \why not - not that they literally RUN THE GOVERNMENT AND the economy of the worlds most powerful state... and have succeeded in the above-described aim to a very large degree???

Trained by the conspirators many media minions to believe that a 'western' cabal of bankers was behind the sudden slump in shinys' fortunes ... most decisively as of April 2013... the bagholders were blind to the real players and motives behind their ongoing pauperization... brainwashed to ignore all the evidence pointing to the real manipulators, the concordance of geopolitical strategies of decaying the occidental powers with the economic one employed via the precious metals and associated derivatives trades -

these roadkill warriors in turn ...pounced pon any who dared offer counsels of caution.... flounced when shown evidence of who was really emptying their wallets... and then pouted endlessly bout the cruelty and unfairness of it all - in the last stage of their staggering demise

which is pretty much now. CAPITULATION you say? Have we reached it yet? The answer is YES... & NO. Wise onlookers always predicted that we would need clear out the riff raff before the bullish market would return. They are indeed to large measure, done. The once loud and braying voices of the hard core deadenders here reduced to a pitiable moaning... the reputations of once high riding gold gurus reduced to ashes...

the psyops by which certain 'financial media' sites pushed a heady concoction of 'gold to the moon' mixed with BRICS N THE NEW SILK ROAD... aka "DEATH TO AMERICA"... altogether out in the open now, for even the witless among us to see!

Bring out your dead!... but, err... there's nobody left to carry em out! \a dread silence reigns over the once noisy GOLDBURG... and it's silver slumtown. The crowd of crowing 'financial geniuses' has all gone... where ever the piper has led them. What's dat sound in the distance?

Do lemmings PLOP ... when they DROP offa cliff? Or is the sound of gravity at work more like a PLOOOF... as the puddles of blood n entrails grows ever higher?

Nickel over spot... today only...
SGE will change the market fo-ever... TODAY ONLY!

In reply to by abyssinian

Albertarocks Mr_Potatohead Tue, 10/17/2017 - 22:47 Permalink

I doubt that.  Jaime publicly called his own daughter "stupid" just to make a point about Bitcoin.  He's a typical psychopath, not giving a shit who gets hurt as long as he gets his way... including his own daughter.  The only way a man could stoop so low would be if he himself was called "stupid" by his mommy.  She probably said "Jaime, you're going to grow up to be such an asshole."  And he interpreted that as a piece of advice and took it to the bank.

In reply to by Mr_Potatohead

E-Knight tmosley Tue, 10/17/2017 - 23:19 Permalink

I know you are generally hated here, but you had a comment about crypto currencies being more important than crypto tokens. Almost all currencies are too expensive now compared to gambling shitcoins, what would you say to new people who missed the 5000% or whatever bitcoin rise?


In reply to by tmosley

Womb Service E-Knight Wed, 10/18/2017 - 01:31 Permalink

You haven't completely missed it. If Bitcoin captures 10% of the foreign exchange market, that implies a price of 1 million USD per coin. If it matches the market cap of Gold (which is hugely undervalued) it would have a price of around 400K per coin. It's still early days. No one I know around me has any. I still get that glazed over look when I mention it. Just stay away from the altcoins. 99% of them are garbage and will never go anywhere. Litecoin might do okay with atomic swaps. Maybe. Bitcoin has already been invented. It's called Bitcoin.

In reply to by E-Knight

GunnerySgtHartman Tue, 10/17/2017 - 22:16 Permalink

the ratio of paper to physical was estimated by the Reserve Bank of India at 92:1If that doesn't smell of a strong upside for physical gold when SHTF, I don't know what does.

Yen Cross Tue, 10/17/2017 - 22:04 Permalink

    The SQUID is the last bastion of INFOmercian I'd be looking for advice from.   As an example; JPM , Squid, DB ect- were long eur/usd last week. What exactly has changed, while the eur/usd has leaked lower? I know the answer, and still maintain a hedge.

wintraiz Tue, 10/17/2017 - 22:22 Permalink

Goldman needs to be watched.  A lot of traders on ZH were discussing Shepwave.  True that many months ago Shepwave gave a target of 1360 for gold. I think it was still at 1100 or lower.  Then when gold was at 1340 goldman gave the same target as Shepwave.  I see now why they left Goldman.  The analysts can seem arrogant from time to time but their market calls are spot on. Keep it goin.

RedBaron616 Tue, 10/17/2017 - 22:47 Permalink

Why are there "goldbugs" but not "bitcoin-bugs"?  Seems to me that most bitcoin-bugs on ZH have the old-time religion equal to or great than any "goldbug" I ever saw. I don't consider myself a goldbug, but just making the comparison between the two.

Fourth Horseman RedBaron616 Wed, 10/18/2017 - 03:21 Permalink

Because every perceived "advantage" of cryptos has been proven false.
It is NOT anonymous
It is NOT unhackable
The list goes on.

Top it all off, you cannot hold it in your hand because it is nothing but an electronic ledger just like the dollar ponzi.

Turn off the lights, such as an emp... wheres your shitcoins now? Eh?

THATS why goldbugs don't like cryptos. It's another long term scam on the goy

In reply to by RedBaron616

brushhog RedBaron616 Wed, 10/18/2017 - 07:37 Permalink

Because when you seperate yourself from the system they need a name to disparage you. Crypto people are not seperating themselves, they are reliant on a network to make bitcoin work. They need functioning computers, an internet connection, power, and others to 'believe' in the bitcoin network. A physical gold owner can take his gold out of the system, bury it in his backyard and give two middle fingers to the world....they need a name,a label, that suggests this person is "crazy" for not depending on them.

In reply to by RedBaron616