Last Wednesday, before a massive sell-off in the gold market, Goldman Sachs strategists told clients to short the precious metal, targeting $1450 an ounce (at the time, gold was trading around $1580).
One of the reasons for the call was a big outflow from gold ETFs that really picked up speed in the first quarter.
Now, with gold trading at $1385, below Goldman’s $1450 target, strategists at the bank are still warning that the downward move may have further to run.
“We believe there is the potential for a further sell-off in ETF holdings given that a significant portion of the holdings, 8 moz or 11% of the existing holdings, were purchased at levels at or above current gold prices,” writes Goldman’s top commodities strategist Jeffrey Currie in a note to clients this morning.
According to Currie, the big sell-offs in gold on Friday and Monday – the worst days the market has seen in decades – were caused by fears that the decision to sell gold in Cyprus to help finance a bailout could spread to other euro area countries.
In the note, he writes:
Over the past week this trend started to accelerate, with the extremely large move likely triggered by growing concerns that the central bank of Cyprus would sell its gold reserves, potentially triggering a larger monetization of gold reserves across other European central banks. The decline in prices was further exacerbated by the breach of a well-flagged key technical price support level at $1,530/toz and then at the $1,434/toz 200-week moving average, creating the largest one-day price decline since the inception of the COMEX.
Although gold traded below the $1,450/toz target embedded in our short gold recommendation, we maintained our short recommendation, as we argued last week that prices could decline more than we initially thought as positioning is stretched and the momentum is to the downside. Accordingly, yesterday we lowered the stop to $1,400/toz as we wait for evidence of a near-term bottom to establish a new target; however, for now we are not changing our price forecasts.
On ETF holdings, Currie writes (emphasis added):
This stretched positioning was confirmed in the most recent data on ETF holdings through Tuesday. The report showed acceleration in the liquidation of length, falling nearly 2.0 moz over the past week for a total of decline of 8.5 moz or 10% since the peak at the end of last year. We believe there is the potential for a further sell-off in ETF holdings given that a significant portion of the holdings, 8 moz or 11% of the existing holdings, were purchased at levels at or above current gold prices.
Finally, to put the size of the ETF holdings into context: at its peak of 84.6 moz, the ETF’s aggregate holdings were the third-largest in the world, ranking behind only the US and German central banks. The 8.5 moz liquidated from ETFs since the start of the year represent almost 10% of annual gold mine supply, which takes the aggregate ETF holdings down to a number four ranking, with only the IMF moving ahead. However one measures the aggregate ETF holdings, they are still extremely significant.
Gold has rebounded a bit from the low of $1321.50 an ounce it put in on Monday. Today, it’s trading around $1385 (down 0.2%).