In a report Monday, Goldman Sachs technical analysts, Sheba Jafari and Jack Abramovitz said that they see gold prices falling to $1,100 an ounce after the market was unable to test key resistance around $1,380 an ounce, which they noted represented a key level from the 2011 high to the 2016 lows.
"If true, it’s on track to forming another three wave decline which at very least comes close to testing the previous lows from Dec. ’16 at 1,123," the analysts said. "It could extend as far as 1,105; but shouldn’t run much further than there (given the corrective nature of the setup)."
In the current technical environment, the analysts said that gold could eventually retest support around $1,100 an ounce, however, they said that they expect that support to hold.
Goldman Sachs has been fairly bearish on gold, even as prices pushed to a one-year high last month. In a September report, the investment bank maintained its outlook that gold prices will end the year at $1.250 an ounce.
The bank’s reasons for being bearish gold is that it expects the U.S. dollar to shake off recent weakness. Monday, the U.S. dollar index continued to hold near a 10-week high Monday as expectations for a December rate hike rise significantly.
Goldman Doesn't Understand Gold
Goldman Sachs' superficial comments prove they do not understand gold.
Gold is not a play on the dollar or rising or falling interest rates. Gold fell from 850 to 250 with inflation (and interest rates falling) every step of the way.
More recently, gold started rising just as the Fed began hiking. In 2005, gold rose with the US dollar.
Gold Does Well in These Environments
- Decreasing faith that central banks have everything under control.
- Rising credit stress and fear of defaults
Gold Does Poorly in These Environments
- Disinflation (1980 to 2000 is a perfect example. There was inflation every step of the way but gold got clobbered).
- Increasing faith in central banks’ ability to keep things under control (Mario Draghi’s “Whatever it takes” speech triggered a prime example)
Gold does worst in prolonged disinflation and in periods that have rising faith in central banks.
I suppose one could condense this all down to increasing or decreasing faith that central banks to have everything under control. Alternatively one might think of periods of rising or abating credit stress.
Gold vs. Faith in Central Banks
For additional images, please see my 38 slide powerpoint Venture Alliance Presentation on trends in sentiment, asset bubbles, and gold from June 24, 2017.
Mike “Mish” Shedlock