I wrote an article recently titled "Stars Are Aligning Against Gold; Hope Vs. Fear," making the case that the main support of gold is fear and that hope was returning to the market. I also made the case that gold was behaving like a leveraged bond fund, and that when the economy rebounded interest rates would likely increase as well, providing an alternative to buying gold. Since the time those articles were written we have experienced yet another banking crisis in Cyprus, yet SPDR Gold Trust (NYSEARCA:GLD) is selling near or below the level it was at when I wrote those previous articles. If a Cyprus bank crisis, the Japanese Central Bank putting their monetary policy on steroids, and Kim Jung-un threatening a nuclear attack on the U.S. don't send gold higher, what will?
Apparently, not much. In the face of all those headlines, Goldman Sachs is recommending that people not only sell their gold, but actually short it. They cite people's waning enthusiasm for holding gold.
Not only that, Goldman Sachs has been lowering their target for gold prices:
The analysts cut their gold forecast to $1,450 per ounce for 2013 and $1,270 for 2014, the second cut in their price target this year.
If gold reaches that lower target, it would be 18% below the current level and off over 30% from its peak of $1,889/oz.
Banks bullish on gold have also cut their forecasts:
UBS also cut its 2013 outlook for gold this week to $1,740 from $1,900. However, the bank held its 2014 forecast steady due to uncertainty regarding the eurozone and a possible end to the U.S.'s ultra-easy monetary policy.
And what arguments are being used to support gold I find totally unconvincing. Sure, central banks have been buying gold, but what has that done for its price? Gold is off nearly 20% from its peak. What good has this record gold buying done, other than slow the fall of gold? And when they figure out that gold is a risky asset to hold on a balance sheet, what happens when they "unwind" their positions?
According to the World Gold Council, central banks' gold purchases in 2012 were the highest for nearly 50 years, as banks sought to diversify their reserves.
'You don't fight the stock markets when the Fed is easing, so you wouldn't want to fight the central banks when they're buying gold, because they have deep pockets,' Silverman said.
The recently released Fed minutes appear to be increasingly hawkish against inflation, and therefore bearish against gold.
In conclusion, as optimism returns to the economy and markets, the main pillar holding up gold will crumble. Hope and recovery will likely be the final straw that breaks the back of gold. As bond rates increase, people are likely to sell gold and buy the income generating bonds. Yes, long-term bonds will lose money as interest rates increase, but as I demonstrated in the article highlighting how gold is behaving like a leveraged long bond, gold will likely lose even more money than holders of long-term treasury bonds -- and they won't get the interest payments and guaranteed payment at maturity. Gold simply suffers by comparison in a rising rate environment. Call it Treasury envy.
One additional note: Central banks don't buy assets for investment purposes, they buy assets to manage their monetary policy. If a central bank purchased gold, it increased its money supply. If it gets to the point where it wants to decrease its money supply, it will sell what assets it has. If gold is falling in price, it will have fewer assets on its balance sheet than outstanding currency. Central banks are now becoming aware of that fact, and once they fully grasp the consequences of that, they will likely want to shed their gold with every opportunity they get. In my opinion, central banks holding gold isn't a reason to hold gold -- it is a reason to sell it. That's because once the central banks start selling to "unwind" their expansionary monetary policy, gold is almost certain to be driven lower in price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.