Summary

-The forecasting model is biased towards a bearish stance towards commodities now and links the rising interest rate forecast to the falling fortunes in commodities, including Gold

-The forecasts had failed to portray the rout in Oil well before it happened and could well be wrong when the forecasts continue to be bearish now

-Goldman’s bearish hug on Gold is baffling

 

Goldman’s ‘bearish’ hug of commodities wasn’t even there in the 2014 ‘Outlook, the yearly economic forecasting piece that Goldman publishes around January every year. In fact ironically the piece was captioned, “Within sight of the summit”, that had a picture of a steep peak with a small description, ‘We had a great climb’, as if 2014 was the year of the ‘last stretch’.

The section on Gold in this same report of 2014 was very striking though, “Today’s gold prices still have significant downside to their long-term averages, despite their considerable decline thus far.” The pointer was that dollar debasement and high inflation have both failed to materialize therefore Gold’s ‘safe haven’ status was not a case worth exploring by the investors. It went on to mention that 850 tons of Gold was sold by the ETFs in 2013 and there was no case for any revival in Gold prices.

The same report on Oil in the preceding page had a different tinge. It said, “In 2013, non OPEC crude oil production increased the most in 28 years, driven by North America and the United States in particular. Total US production reached an all-time high, with crude production up 15% and total liquids (including natural gas liquids, biofuels and liquefied petroleum gas) production surpassing its 1970 peak. While such rapid growth might prove difficult to sustain in the long term, we expect the ongoing “shale revolution” to provide a tailwind to US production for years to come.”

The price forecast for Oil in 2014 January read as, “While we do expect the price of Brent oil to decline from current levels, it should ultimately settle in the range of $90–$110 per barrel in 2014.”

In 2015, the same report under the section on Gold, captioned, ‘Gold: Still Losing its luster’, went on to say, “With gold prices down just 2.1% in 2014, it is tempting to believe the three-year, 36% price swoon has fully run its course. After all, last year’s decline was far more benign than that of many other commodities, not to mention gold’s own 28% drop the prior year. Yet such a cursory review misses the bearish gold fundamentals that we believe are still at play. In particular, the stronger US growth we expect should support higher US real rates, thereby raising the opportunity cost of holding gold.”

Finally the bearish stance on Gold prevailed with the remark, “we recommend a small tactical allocation to bearish gold strategies.”

The 2015 Report on Oil needed some explanation as the prices were moving in the other direction very dramatically and the reasons articulated were as follows:

  • What made the decline even more surprising is that many of the reasons put forward to explain it have been hiding in plain sight for some time. US crude production has been growing at a double-digit annual pace for years, while Chinese GDP growth has been slowing since 2007.
  • The resulting price selloff was accelerated by the Organization of the Petroleum Exporting Countries’ (OPEC’s) inability to agree on production cuts and Saudi Arabia’s unwillingness to act as the traditional “swing producer.”
  • Because US shale oil is among the most expensive sources of production, and because it requires constant drilling to offset the wells’ fast decline rates, the US is likely to emerge as the new swing producer for the oil market.

Finally the forecast was recorded as “As a result, we expect oil prices to stabilize between $60 and $80 per barrel. Importantly, that range should allow US production growth to expand at a pace that doesn’t overwhelm the global supply/ demand balance.”

This was denouement that did not hold true in most of 2015 and Goldman continued to revise its price forecasts downwards throughout the latter half of 2015 and continue to do the same in 2016 as well.

 

Let us now look at the 2016 report, “Outlook” that came out in January. The picture on the report has changed to “The Last Innings”, with a baseball pitcher about to throw the ball and the add-on mentioned Yogi Berra’s comment, “it ain’t over till it is over”.

The section on Gold read as “In search of luster”, and the commentary was one of mixed caution that finally read as, “market sentiment is very dour currently, with speculative long positioning at its lowest level since 2002. Such lopsided positioning makes the market vulnerable to sharp rallies, as we saw in both January and late summer last year. This is particularly true as we near the psychologically important price level of $1,000 per ounce, which is likely a significant technical support. Given these crosscurrents, we are tactically neutral on gold in the near term.”

Gold has since then moved north and is now well over $1100 per ounce and this when the dollar tightening is yet to happen.

The more interesting picture emerged in the predictions for Oil for 2016. It said two things:

-We expect oil prices to range from $40 to $60 per barrel by the end of 2016, with a volatile path in between. For the first half of the year, price risks are skewed to the downside, as rising inventory levels challenge storage capacity constraints at the same time that Iranian oil returns to the market

– Today’s large accumulation of speculative short positions in oil futures suggests that any signs of rebalancing could lead to rapid price rallies, as we saw at various points last year

– Finally, oil prices now stand below their inflation-adjusted historical average, providing scope for upside

Interesting to note that Goldman continues to portray a slightly stronger dollar in the section, ‘Modest Overweight to the US Dollar”, which said, ‘We have substantially reduced our overweight to the dollar relative to the euro, expecting a modest 6% outperformance from current levels.’ The actual reality in the first four months is quite different.

The prediction of a stronger dollar, a rather indifferent Gold price (lacking luster) and Oil averaging $45 for the year are all due for some serious rework, if one goes by the current trends.

 

 

 

 

Goldman’s forecasts on commodities need some serious rework

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