Goldman's Gold Analysts Fail To Grasp Reality

Includes: GLD, IAU
by: Quoth the Raven

Goldman Sachs (NYSE:GS) recently downgraded its outlook on gold causing me to ponder if I missed something over the past 10 years. Usually, I find Goldman's analysis to be prudent and reputable when it comes to the market and investing, but here's an instance where we don't necessarily agree.

Goldman's Downgrade of Gold

Having said that, Goldman Sachs, continuing to operate in its own Keynesian alternate dimension, has lowered all of its price targets on gold:

Goldman cut its 2013 gold estimate to $1,545 an ounce from $1,610, trimmed its 2014 forecast to $1,350 from $1,490, and set year-end targets of $1,450 in 2013 and $1,270 in 2014. Goldman recommended starting a short Comex gold position, targeting $1,450 with a stop at $1,650, the analysts wrote.

Goldman is citing the gold cycles and "waning interest in gold" as a reason for lowering its targets, which is something I could lend an ear to if we weren't in the midst of one of the biggest money printing bonanzas in the history of the world as we know it. Goldman commented:

"Despite resurgence in euro-area risk aversion and disappointing U.S. economic data, gold prices are unchanged over the past month, highlighting how conviction in holding gold is quickly waning," the analysts said in a note. "With our economists expecting few ramifications from Cyprus and that the recent U.S. slowdown will not derail the faster recovery they forecast in 2H13, we believe a sharp rebound in gold prices is unlikely,"

Well, Goldman, that's all good and well, but you're ignoring the fact that an investment in gold 10 years ago could have already yielded you over 400%, and there's a reason behind that: our worldwide monetary policy as it stands makes gold a consistent long-term winner, no questions asked.

"Sure," you'll say to me, "but doesn't it look like things are going to correct here of recent? Can't you see that the price looks as though it's going to fall through the floor now?"

My response to that is that we are at one of many smaller corrections and pullbacks until we continue upwards, similar to what we can see from the past:

Why So Many Analysts Insist Gold Will Tank

This is a non-complex issue that economists like to make it sound complex in order to further their temporary need for market stimulation. Anyone that tells you that the result of Nixon shock is any more complicated than supply and demand methods learned in an ECON 101 class is trying to pull the wool over your eyes. What I mean by that is that this is a far less complicated issue than many economists will have you believe. It has to do with the amount of money in the supply versus the finite, unchangeable amount of gold available worldwide.

So, the wool that Goldman could be trying to pull over your eyes here could be the same tactics used by analysts, market makers and hedge fund traders everywhere: create a trend and buy/sell the opposite into it. If you think Goldman could not possibly be buying gold on their very own downgrade and assumed corresponding price decline, then I have some real estate in Alaska I'd like to sell you. I'd bet dollars to donuts that the "waning interest" in gold that Goldman is citing could be as fabricated as the money we continue to print.

As I said in "My 17 Definitive Cardinal Rules for Investing Success," you have to understand that all of these people have money in the same game they're directing the public's investments on:

As much as I hate (read: love) to bash Jim Cramer in two successive articles, he's the pinnacle example of this rule. Much of the public was absolutely flattened when they watched his interview a couple of years back on the Daily Show. In this interview, Jon Stewart played back for Cramer a YouTube video of himself openly admitting to making up and disseminating rumors about companies when his hedge fund was short them. This was the public's first glance into the dirty work that goes on behind the scenes at hedge funds; if they knew the down and dirty details, jaws would drop all the way to the ground.

The lesson I hoped the public learned from this is that 95% of the people feeding you advice; whether it's here on Seeking Alpha, on CNBC, or in the Wall Street Journal all have agendas and positions that they're trying to make money on. Believing these people disclose these positions all the time is laughable. Take everything, including what I write, as a sales pitch. Go in as a skeptic and question motives. Again, finance is a lesson in cutthroat 101.

The only point I can see for downgrading gold here is to be able to try and buy at a lower price. Since the Nixon shock of the early '70s, gold is only going to continue to head in one direction: up. To understand why, again, you don't need to be some seasoned analyst at a firm somewhere; you just need to understand that gold is a finite non-renewable resource with only a set limited quantity of it on earth, and printed money...well...isn't.

If you're more of a visual learner, this chart does the trick splendidly. If you prefer written words to charts, check out this next sentence:

The More Money We Print, The Higher Gold Will Go

Now, after having appealed to both auditory and visual learners, let's get back to the task at hand. You have to give Goldman some points for "hanging it out there," though, right? I mean, they actually cited the Cyprus crisis as a reason NOT to buy gold. Nothing suggests "living in the Bizarro world" more than taking two points that are extremely correlated and furiously suggesting that there is no correlation whatsoever between the two.

That'd be an interesting social experiment. Don't you think you'd be hard pressed to find a Cypriot citizen on the street right now that wouldn't happily turn in their paper currency for gold in the same non-inflation adjusted amount?

Interestingly enough, I just covered this in my article "4 Steps to Prevent Your Own Personal Cyprus." I stated:

In order to know the markets and how they work, you need to understand the economic model being used in the U.S. and what the difference between the Keynesian and Austrian schools of financial thought is.

In the U.S., we are very much purveyors of the Keynesian school of economics and we have been since the establishment of the Federal Reserve. The Federal Reserve was founded to ease recessions, stop panic, and give people a short-term warm and fuzzy feeling about the state of economics. The Federal Reserve is the big brother watching over everybody, keeping everybody safe and perpetually prosperous, no matter what the long-term costs.

This is why we have things like quantitative easing from the Federal Reserve. While it's great for the markets, it creates bubbles that could burst just as quickly as the housing bubble did. To be a coherent investor and good with money, you have to understand the mindset that goes behind moves like this, how they stray from the absolute basics of supply and demand, and why that puts us at substantial risk; even while yielding the benefits of the markets "constantly skyrocketing."

Corrections are a normal part of finance. Like bubbles, they occur to readjust markets that are aligned incorrectly due to economic basics like supply and demand. Inflating our currency to avoid these small bubbles usually ends up creating massive super bubbles that could happen any time; make sure your portfolio is adjusted accordingly. Remember, there are ways to make money in a recession the same way there are ways to make money in a bull market; the key is timing.

I finished my article by suggesting that people keep cash & gold on hand and in reserves in case of emergency -- just like the giant central banks do:

Now, despite what Ben Bernanke thinks (or doesn't think) about the value of gold versus Federal Reserve notes, gold is still a sound & fixed source of holding currency/value. Ron Paul feeds the basics of supply and demand to Ben Bernanke on July 13, 2011. The conversation went like this:

Rep. Paul: Do you think Gold is Money?

Bernanke: No...

Rep. Paul: It's not money? Even if it was a precious metal for 6000 years somebody reversed that, eliminated that economic law?

Bernanke: Well…it's an asset. Would you say treasury bills are money? I don't think they're money either.

Rep. Paul: Why do Central Banks hold it?

Bernanke: It's a form of reserves.

Rep. Paul: Why do central banks hold it? Why don't they hold diamonds?

Bernanke: Tradition, long-term tradition…

Rep. Paul: Some People Still think it's money….

I contend holding gold is actually more valuable than holding cash in the long run because

1. Gold prices will continue to go up

2. Gold is a universal, non-renewable resource on which thousands of years of economics is based.

And no sooner does a couple of hours go by that I noticed Cyprus is selling guess what to get them out of their crisis? Their gold reserves. As reported today by Bloomberg, Cyprus is selling about 400 million Euros worth their gold reserve to help finance their bailout. The article stated:

Cyprus has agreed to sell excess gold reserves to raise around 400 million euros and help finance its part of its bailout, an assessment of Cypriot financing needs prepared by the European Commission showed.

The draft assessment, obtained by Reuters, also said that Cyprus would raise 10.6 billion euros from the winding down of Laiki Bank and the losses imposed on junior bondholders and the deposit-for-equity swap for uninsured deposits in the Bank of Cyprus.

Remember what Goldman Sachs said:

"With our economists expecting few ramifications from Cyprus"

Firstly, mark my words this is going to be the beginning of a terrible period of poverty for the country.

Secondly, I don't really know how you can have an "excess" of gold when your country's entire economy just collapsed.

Selling their gold reserves now seems like the worst possible decision for them. The point I'm trying to make though, is why they had gold reserves to begin with. Threading the needle yet?

Conclusion & Why Goldman has the Wrong Idea About Gold

There is a reason central banks hold gold in reserve. Do you want to take your cues from them, or from an analyst at Goldman Sachs that is predicting a temporary downturn in gold pricing?

So Goldman has the wrong idea about gold for a couple of possible reasons:

  • They're either misleading the public on purpose with their Keynesian/extreme near-term thinking on gold, creating a message that suggests gold may not be a good long-term investment in order to purposely drive prices down.
  • They're so far in this alternate "financial world/Keynesian/short-term thinking" bubble that they actually believe their own analysts when it comes to stuff like this.

You'd be hard pressed to find an analyst anywhere that could ignore yet another one of my patented "haymaker" charts like this:

If that doesn't sum the whole argument up in one chart, I wouldn't know how to do it. The only variables missing to make that chart an even more potent statement would be how much money has been printed and inflation.

I would be interested to see how much gold is in the portfolios of Goldman Sachs executives; I'd bet the farm their portfolios are laden with both gold and silver.

The message to this article is simple: at the end of the day, backed by thousands of years of economic law and the basics of supply and demand, gold is as solid of a long-term investment as you can get. No analyst downgrades or short-term Keynesian thinking is going to get me to budge on that, and I'd suggest you'd consider the same. That's why Goldman Sachs has the wrong idea about gold.

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.