Goldman commodity analyst Damien Courvalin is out with a big call: The top in gold is in.
The firm says that the primary driver of gold prices is real interest rates (which have been super-low in the United States, in part thanks to aggressive Fed easing) and that with the economy coming back, this era is coming to an end.
Before you get the details of this specific call, you have to understand the firm’s overall view of the economy.
Last Week, Goldman economist Jan Hatzius made a big economic call … that the era of sub-par, post-Financial Crisis growth would come to an end some time in the second half of 2013. And Courvalin, in lowering his gold outlook, is keying off of this call.
Here are the two key paragraphs from the report:
Improving US growth outlook offsets further Fed easing
Our economists forecast that the US economic recovery will slow early in 2013 before reaccelerating in the second half. They also expect additional expansion of the Fed’s balance sheet. Near term, the combination of more easing and weaker growth should prove supportive to gold prices. Medium term however, the gold outlook is caught between the opposing forces of more Fed easing and a gradual increase in US real rates on better US economic growth. Our expanded modelling suggests that the improving US growth outlook will outweigh further Fed balance sheet expansion and that the cycle in gold prices will likely turn in 2013. Risks to our growth outlook remain elevated however, especially given the uncertainty around the fiscal cliff, making calling the peak in gold prices a difficult exercise.
Gold cycle likely to turn in 2013; lowering gold price forecasts
We lower our 3-, 6- and 12-mo gold price forecasts to $1,825/toz, $1,805/toz and $1,800/toz and introduce a $1,750/toz 2014 forecast. While we see potential for higher gold prices in early 2013, we see growing downside risks.
The essence of the call is boiled down to this chart, which compares gold prices to real interest rates (inverted). Given their expectation that real interest rates will rise, gold will follow the dotted line, and will decline the same way there was a decline in the 1980s
Photo: Goldman Sachs
The key thing to realise is that this call is really the only natural corollary to Hatzius’ call that growth will accelerate to above-trend levels in the second half of next year.
The firm’s overall stance is that the deleveraging/balance sheet economic crisis is coming to an end. That will end this rates era, and this huge run for gold.
It’s a huge turn.
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