Can Goldman Sachs be correct again?

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The recent fall in prices of gold are in line with Goldman Sachs assessment of the metal and ‘gold bugs’ are watching to see if Goldman is proven correct once more.

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Can Goldman Sachs be correct again is the million dollar question?

Recent price drops are rooted in reality, while some of the loss of value is based on investor paranoia. And now that Goldman Sachs has again downgraded their assessment of the value of the metal to $1000/oz (which was circulating at $1800 a few months earlier), the concern by the investment banking giant is driven by recent moves of the Federal Reserve to cut back its monetary easing measures — just as the economy seems to be on a weak rebound.

It seems the shiny metal is losing some of its lustre and people are heading for other investment opportunities like oil, which is considered a hedge against gold during times of economic growth. The skepticism that gold investors feel is related to a recent price decline where a previous announcement by Goldman had later seen a free-fall in the price. The free-fall also triggered many of the central banks to assess their own situation of gold reserves — which shows that there was consideration to move to other investment vehicles, as gold lost value.

The ones who have been hit before are cautious of this figure and are now selling first and asking questions later. We must note here that when Goldman had predicted price to be $1200, the market actually corrected to lower than $1200 — only to rebound to $1400 more recently.

It seems that gold was all the rage in the period leading up to the Global Financial Crisis and as the economies around the world tumbled, the gold investment became more attractive. With the Eurozone crisis in full swing and the world economy seeing persistent recessions, the price of gold amassed to a near bubble reaching an all-time high. But now as more and more economies are finally finding their feet, the investment does seem to be turning south.

Maybe it is the fact that the overvaluation of the metal needs to be written down to some extent or that people want higher and better returns from other avenues. Whatever the reason, there is consensus in the market that the value has plateaued, and the volumes and interest have stagnated.

Some sort of catalyst here, would trigger a move upward or downward and stimulate the market. The recent job numbers released on Friday pointed towards a dip in employment,and the spike in gold prices instantaneous — but the buying interest was quickly absorbed by the high amount of selling, which led to a slow decline in prices, once the markets opened Monday.

It seems that investors are on the sidelines biding their time before making bets on the upside or downside of gold. The announcement by Goldman may indeed have set a tone of skepticism in the gold market, and it waits to be seen in the coming days whether the market will comply with Goldman’s assessment, or again resist the downward pressure and rally towards $1400.

© Zain Naeem

Photo: Mark Herpel/Flickr

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