Goldman: Sell Gold

Yesterday, Goldman Sachs strategist Jeff Currie came out with a report explaining why systemic risk fears are overblown. In a nutshell, Goldman believes that the possibility of EM sovereign collapse is being overstated and the impact from falling energy prices has probably already run its course.

You can feel free to be as skeptical as you’d like on that score.

Currie takes a look at the burst of enthusiasm for gold this year, given the widespread fear of a new crisis beginning. He says to fade it. Here’s why:

The impact China has on gold is twofold (1) the financial channel via its large holdings of US treasuries and (2) the physical channel via a desire by citizens to hold gold to diversify out of RMB given the capital controls. Going forward the financial channel is likely to depress gold prices as China has been and will likely continue to be a net seller of US treasuries which is negative gold prices given the negative correlation of gold with US treasury yields. To offset this negative financial channel, we believe it would require a very large amount of physical demand which is unlikely. Over the last three years, average investment bar demand from China was 7.5 million toz against average ETF outflows of 12.5 million toz.

In addition, we find that physical demand from China is mostly in jewelry form which is residual demand that is extremely price sensitive which suggests should prices rise this demand would slow considerably. On net, fears around China, oil and negative interest rates have likely been overstated in the gold price and other financial markets.

The fear trade is hot right now. It rarely stays hot if the wheels don’t come off. So far, that hasn’t happened.

As for whether gold is even the right hedge if the bears turn out to be correct, I would point you toward my pal Charles Sizemore, who took on some of the big arguments in favor of owning gold:

“Gold is a crisis hedge.” I’m a little more sympathetic to this view. I’m a big believer in having a true zero hedge in the event the world really did go to hell in a hand basket. So yes, having a little gold bullion buried in the backyard, along with a good supply of shotgun shells, isn’t the worst idea. (I’m from Texas. We’re all nuts.)

But as far as safeguarding a portfolio, I’m less convinced of gold’s value as a crisis hedge. When the world gets truly shaky, investors tend to flock to the U.S. dollar and to U.S. government bonds rather than to gold. In fact, the price of gold actually fell during the 2008 meltdown, and I would expect more of the same in the event of another global crisis.

So, by all means, keep a few gold coins stashed away somewhere safe… just in case. But don’t overload your investment portfolio with the stuff.

I agree with this. I’m not opposed to investors keeping some coins stashed away somewhere. But we don’t use gold in our portfolios because we see cash and treasurys as a better “safety” sleeve in the event of a crisis. Gold goes up and down, does really well sometimes and really poorly at other times. It is not a true replacement for US bonds and US dollars at the moment where it really counts.


Nothing to fear but fear itself
Goldman Sachs – February 15th 2015

Gold: Hedging for WHAT, Exactly? (Sizemore Insights)

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