Goldman Sachs Betting on Stronger Economy; Gold Divergence Still in Play

by on January 20, 2014 7:45 am BST

Hedge fund became increasingly more bullish on stronger Chinese demand, but – the bear – Goldman Sachs believes the gains will be short-term even though net-long positions increased 7.6 percent for the week ending on January 14. However given the large declined seen in 2013, net-longs across the 18 US traded commodities increased by 2.6 percent.

Goldman Sachs continued to bet on a stronger economy and that gold will continue lower throughout 2014. The divergence of spot gold prices and demand continue to grow. The 28 percent dip in gold provoked a buying frenzy throughout Asia, mainly mainland China, with deliveries by the Shanghai Gold Exchange nearly doubling in 2013. There is also speculation that the People’s Bank of China (PBOC) doubled its gold reserves within the last year.

Gold prices are not reflecting the demand for physical bullion, and it is hard to determine the true nature of prices. Spot gold is likely going to remain low, or at least range bound, for some time as large firms short gold contracts with the assumption the US, and broader-global market, will continue to grow and inflation is not an issue. It is the selling of these gold derivatives that is holding prices down. I speculate this is being down to allow certain parties, including central banks, to accumulate gold at lower levels while vaults are being drained.

Tres Knippa, a Chicago Mercantile Exchange trader, was featured in a Business News Network feature and reported that the COMEX may not have enough gold in inventory if everyone with a futures contract requested physical delivery. Knippa stressed the fact that if one was to own gold it would need to be physical bullion over a certificate of ownership, or other paper derivative. If there was ever a run on gold inventories, those holding paper may be out of luck.