In a new interview with CNBC, Goldman Sachs Head of Commodities Research, Jeffrey Currie, was nothing but consistent in his 2014 gold price forecast and is sticking to his $1050 target for gold by end 2014 – a figure he first came up with in the first half of last year. Thus he feels that gold’s relatively strong start to the current year is likely to be shortlived and, as in 2013, gold will likely shed value throughout 2014.
Now, the principal problem for gold bulls with Currie’s forecasts is that they can tend to be self-fulfilling prophecies given the God-like status of Goldman Sachs in financial markets. Currie famously told clients to sell gold short in April last year – just two days before many big gold investors seem to have followed this advice and the gold price plunged. Later in the year, in October, Currie told a conference panel in London that gold had to be a ‘slam dunk sell’ with the U.S. Fed likely to begin its tapering programme and reduce its $85 billion a month bond buying programme once the then prevalent budget impasse ended. This too generated gold price weakness, although perhaps not to the extent of his earlier ‘short gold’ call.
But Currie’s theme has all along related gold weakness to recovery in the U.S. economy which he thinks is headed strongly upwards and will enable the Fed to continue its tapering programme and gradually cease pushing more and more liquidity into the economy.
Assuming the Fed can do this without upsetting the growth in general markets – which some feel may crash as stimulus is withdrawn – then Currie could have a point, although some indicators, like the recent U.S. jobs growth figures which came in way below expectations, could dent both the Fed’s and the general public’s confidence in ongoing economic growth. But, the latest job figures are so puzzling to most observers that they may well be just an irrational blip and future announcements will see a return to more normal figures in line with such economic growth that there may be.
Meanwhile though, Currie appears to be bearish on all commodities – not just on gold. Speaking in London at a Goldman Sachs investor seminar, he noted “I can’t tell you about one commodity out there that has a bullish supply-side story“.
Indeed he went much further commenting “the rotation away from emerging markets and towards developed market demand as well as the supply increase, particularly the US shale revolution, are creating a new commodity cycle”, which “eventually suggests a structural bear market in commodities”, though Goldman Sachs believes that to be “still in the distant future”. – according to Bloomberg.
Currie bases his observations on what we have described before on Mineweb as the regular cyclical price and supply/demand patterns that tend to afflict the mining/commodities sector. Low prices, exacerbated by an economic downturn in key markets, lead to cutbacks in mineral exploration and new mine development, as well as closures of existing unprofitable operations. (A pattern the gold sector in particular is going through right now.) But, as economies pick up, the cutbacks and shutdowns mean shortages develop, prices rise, exploration and new development pick up again and supplies eventually start moving into surplus – but the time lag can be quite considerable given how long it takes to move a major project from exploration through development to production.
Probably 10 years or more and getting longer in most cases given the hoops mining companies now have to jump through to get a new project up and running. This leads to an extended period of short supply and high prices, stimulating more exploration, expansions and new developments and the tendency is for all of these to start coming on stream over a relatively short period leading to potential oversupply and corresponding price weakness again. In a lifetime mining tends to go through several such cycles and in Currie’s view we are now into the down section of just such a cycle.
There had been a theory put forward that things were going to be different this time around – in particular because of the huge infrastructure development phase China has been going through which has hugely enhanced metals and minerals demand to unprecedented levels. But if China sneezes, as it appears it may be doing at present, and the Western economies turn down, which they have been, this ‘supercycle’ as it has been christened will end prematurely, leading to a general commodities downturn.
Indeed we may well be seeing this happen right now, but if Western economies – notably the U.S. – are already picking up strongly as Currie also seems to believe, then the downturn could be more limited than he suggests, although we have to take gold, and by association silver, as rather less prone to being impacted by the standard commodity cycle.
This is because gold in particular is probably less influenced by swings in global mine supply than the industrial metals with investment and central bank buying and selling largely calling the tune here, although, as we have noted in a previous article there are likely elements of financial/governmental manipulation of these relatively small markets which may tend to distort the picture to a particularly strong degree,
While Currie and his colleagues at Goldman Sachs thus suggest that the S&P Enhanced Commodity Index will contract perhaps around 3% in line with the decline in the commodities cycle this year, they reckon that precious metals could well fall a further 15% even after last year’s 30% decline.
A particularly gloomy forecast for gold and silver miners and investors in particular – but in our view one that could be reversed should China’s huge demand levels continue, India ease off on its gold import controls and the continued flow of physical metal from West to East lead to shortages of physical metal in western markets. COMEX’s position as the most influential commodity exchange in terms of precious metals movement and pricing is also gradually being overtaken by Shanghai which could also have an impact on future price trends – which could be rather more positive for gold and silver than Currie and his colleagues might suggest.