Gold Prices 2014: Do What Goldman Does, Not What It Says

Email
    Text size

Goldman Sachs (NYSE: GS) must really want to buy more gold; this week it repeated yet again its forecast for gold prices in 2014 to drop to $1,050 an ounce.

That might sound contradictory at first, but not when it comes to Goldman.

Jeffrey Currie, the investment bank's head of commodities research, has repeated his $1,050 target several times since last October, when he declared gold a "slam-dunk sell" along with other precious metals.

gold prices 2014But investors need to be very skeptical when looking at Goldman's forecasts for gold prices. Not only are they often wrong, but the bank frequently does the opposite of what it recommends.

That Goldman has seen fit to repeat its $1,050 so frequently over the past six months smacks of frustration.

While gold prices did briefly slip below $1,200 in December, the yellow metal is up about 17% since then. Gold prices were trading at about $1,327 on Monday afternoon - hardly the tumble Currie predicted last fall.

Last month, as gold prices were touching their high of $1,382, Currie took the opportunity to remind the world that Goldman was still bearish.

"It would require a significant, sustained slowdown in U.S. growth for us to revisit our expectation for lower U.S. gold prices over the next two years," Currie wrote in a research note.

Money Morning Resource Specialist Peter Krauth disagrees. From where he sits, the gold selloff pretty much exhausted itself in January.

"The largest physical gold ETF, the SPDR Gold Trust (NYSE ARCA: GLD), sold off 42% of its metal between its record high in Dec. 2012 and Jan. 2014, or 564 tons of gold. That selling looks to have bottomed in mid-January and GLD holdings have started to grow again since then - a major trend reversal," Krauth said.

While gold prices may not get back to $1,900 an ounce, neither are they likely to slump down to $1,000. Even if gold prices do slip back below $1,200, demand from central banks as well as Asia is likely to keep them from slipping to $1,100 or lower.

So why is Goldman so insistent that gold prices are going to drop all the way to $1,050, and why should investors view the bank's forecasts with caution?

To answer that, we need to look at Goldman's track record...

Goldman and Gold Prices: A Shady History

Let's first look at some of Goldman's gold price forecasts over the past few years and how they panned out.

For example, back in 2007, Goldman was bearish on gold, telling its clients to sell. In fact, Goldman declared selling gold in 2008 one of its Top 10 tips of the year.

Of course, gold prices rose 12.2% in 2008 and another 23.4% in 2009.

By November 2011, Goldman was actually bullish on gold prices - it raised its target to $1,930 an ounce about one month after gold prices had peaked.

By May 2012, with gold prices below $1,600, Goldman adjusted its bullish target to $1,840 an ounce. Gold prices did rise slightly after that, but never made it to $1,800, and thereafter started a precipitous decline.

By December 2012 - when gold prices were trading in the neighborhood of $1,700, Goldman revised its forecast to $1,800. Six months later gold prices were slipping toward $1,200.

Goldman finally reversed course in February 2013, beginning its string of bearish forecasts that have continued to the present.

That's actually good news for gold prices, as Goldman always seems to be late figuring out where gold is headed.

Or is it?

Does Goldman Manipulate Gold Prices?

It doesn't quite make sense that a top-shelf investment bank like Goldman Sachs would be wrong so often about the direction of gold prices.

But when you look at Goldman's own gold investing habits, a suspicious pattern emerges.

Goldman is usually buying while it publicly advocates others to sell, and vice versa. It knows many investors will follow its "advice," which in turn helps Goldman to buy gold at lower prices and sell gold at higher prices.

Sure enough, as Goldman was declaring gold a sell last year, it was scooping up the yellow metal like crazy. In the second quarter alone it bought 3.7 million shares of the GLD ETF - valued at about $500 million.

If you've ever suspected gold prices are being manipulated, you're not alone - and you're right, they are," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Bigger firms like JPMorgan, Goldman Sachs, PIMCO, or any of a dozen other behemoths simply release a 'research report' that is interpreted as gospel by the mainstream media and swallowed hook, line, and sinker by millions of unsuspecting investors as a reason to buy or sell."

Knowing this is going on is vital for retail investors, not just so they don't get snookered by the Wall Street heavyweights, but so they can adjust their own strategy accordingly.

Fitz-Gerald said dollar-cost averaging - buying a set dollar amount of an investment at regular intervals - is one tool people can use to avoid becoming a Wall Street patsy.

"Dollar-cost averaging forces you to buy more when the price is low and less when the price is high," Fitz-Gerald said. "Maybe you can't compete with the big banks, but you can beat them at their own game."

Do you believe the reports on precious metals and stocks issued by the Big Banks are valid or simply tools to manipulate the markets? Tell us on Twitter @moneymorning or Facebook.

Playing games with recommendations isn't the only way that Wall Street squeezes profits out of other investors. They also have unfair advantages, like "dark pools" and high-frequency trading. Every investors needs to be educated about what's really going on...

Related Articles: