Gold: Sharp sell-off and the outlook into year-end – Goldman Sachs

Research Team at Goldman Sachs, notes that the gold has dropped sharply over the past month, from $1,350/oz to $1,250/oz, with the majority of the move lower occurring on Tuesday of this week, following hawkish comments by Fed officials (Lacker in particular) and a subsequent break of the psychologically and technically important $1,300/oz level.

Key Quotes

“The recent move lower has been broadly in line with our bearish base-case price forecast path, which was predicated on our US economists’ forecast of a rate hike by year-end (on the balance of probabilities), and rising US real interest rates into year-end. Importantly, the substantial move lower in gold closes the divergence between real rates and gold that opened up during July and August. Also notable is that the move lower does not appear to be driven by physical gold ETF liquidation – physical gold ETFs have actually built over the past week, and as such we expect that Friday’s CFTC report (which will include data through Tuesday October 4, the day the major sell-off occurred) will show a substantial decrease in net speculative short positions.”

With prices having corrected sharply, we are broadly neutral on the outlook for gold through year-end, with our forecast of the probability of US rate hikes through year-end roughly in line with market expectations (GS 65% vs. market pricing 62%). Our expectations for US non-farm payrolls is also in line with consensus, at 175,000. Having said this, the reaction of gold prices has been larger than we had anticipated, and as such this leaves the risks surrounding our year-end forecast of $1,280/oz as moderately skewed to the downside (a key data point to watch will be the degree to which Comex speculative positioning has corrected over the past week).”