Last Wednesday, Goldman's commodities team, led by Jeffrey Currie, issued a short gold trading recommendation to clients, right before the market completely melted down.
In a new piece today – titled "Commodities Update: There are weeks when decades happen" – Currie and his team argue that the latest events in the gold market are a further indication that the run gold has taken over the past decade is over.
At the same time, it seems like something similar is happening in the natural gas market – but there, it's bullish. The Goldman analysts even call it "the new safe haven."
S&P, Goldman Sachs ECS Research
(Short gold, long natural gas?)
Over the previous five years the two highest conviction trades in the commodity complex were being long gold in response to the debasing actions of central banks around the world and short natural gas in response to the shale revolution. These two trends have now likely reversed (see Exhibit 1) and our conviction in these new trends has risen significantly over the past month as we have introduced both short gold and long natural gas trading recommendations.
Further, these shifts in trends represent a significant departure from the past decade and are implicitly interrelated. The shift in gold represents a more confident economic environment where there is a flicker of light at the end of the tunnel to this period of easy money while the shift in natural gas represents the ability for trend natural gas consumption in the US to near 3.0%. This underscores how the shale revolution has helped shape the improving economic environment in the US – making US natural gas and the US economy the new safe haven.
This past week saw both of these trends accelerate with the extremely large gold move likely being triggered by growing fears 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 has now traded below the $1,450/toz target embedded in our short gold recommendation, we are maintaining 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.
The most recent data on ETF holdings from last Friday (April 12) showed acceleration in the liquidation of length, which points to a broad-based sell-off extending beyond the futures markets with potentially more room to go (Exhibit 2). Accordingly, we are now lowering the stop to $1,400/toz (which locks in a potential gain of 12%) and waiting for evidence of a near-term bottom to establish a new target; however for now, we are not changing our price forecasts. For US natural gas, we maintain our $4.50/mmBtu target with forward prices currently trading near $4.30/mmBtu.
Of course, it's not just gold that has been melting down over the past few days. The entire commodity complex has come under heavy selling pressure.
Currie attributes this to fears over cyclical weakness as opposed to a structural shift lower in the commodity market. He points out that "d espite renewed European and [emerging market] macroeconomic concerns and a spillover from gold creating sharp sell-offs in crude oil and base metal prices, the longer-dated commodity prices have been remarkably stable."
"On face value such a dull and uninspiring description does not fit with the speed and velocity of the recent sell-off across the complex," says Currie. "However, the point is that the sell-off was at least partly driven by the non-cyclical commodities – precious metals – with the cyclical weakness concentrated in timespreads as long-term prices remained remarkably stable."
In oil, Goldman says its "cyclically bullish view ... has seen a significant setback in this sell-off."
Brent crude oil is trading right around $100 a barrel today. According to the Goldman strategists, the "near-term risks of $90/bbl Brent remain high despite our base-case view for prices trading in a $105/bbl to $110/bbl range during the second half of this year."
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