Goldman’s Contrarian Currie Foresaw Gold Collapse Paulson Missed
Goldman Sachs Group Inc.’s Jeffrey Currie got ahead of gold’s biggest collapse since 1980 last week because he saw two signals most others missed.
Prices that had risen for 12 straight years as investors sought a haven asset failed to rally amid economic turmoil in Cyprus. Gold holdings in exchange-traded funds tumbled at a time when interest rates remained low.
Currie, the bank’s 46-year-old global commodities research head with a Ph.D in economics from the University of Chicago, issued his sell recommendation April 10, before gold plunged 13 percent in a two-session plunge that ended April 15, the biggest decline in 33 years. Morgan Stanley and Bank of America Corp. followed Goldman, and the slump wiped out almost $1 billion of hedge fund manager John Paulson’s personal wealth.
“You had a whole group of observations that should have created a substantial rally in gold prices, but they didn’t,” Currie said by telephone yesterday from New York. “The fact that gold did not rally on Cyprus amid the bad U.S. data that occurred in that time period created the conviction we needed.”
Investors are dumping gold funds at the fastest pace in two years, researcher EPFR Global said April 16, compounding a slump that has wiped $560 billion from the value of the central bank reserves. The bear market ended the appeal of a precious metal that soared to a record $1,923.70 an ounce in 2011 on demand for a hedge against Europe’s debt crisis and inflation spurred by government stimulus.
Yesterday gold closed at $1,382.70, down 17 percent this year, as inflation concerns recede amid signs of a global economic slowdown.
Gold rose 1 percent in the week after March 16 when Cyprus announced an unprecedented levy on bank deposits, before erasing gains the following two weeks. The country’s finance minister said April 14 it may sell gold reserves to get international aid, helping extend a slump this week after the metal fell into a bear market April 12. Bullion capped a record annual run last year as nations pledged more stimulus to bolster economic growth.
Currie, who manages a team of 11 research analysts, first cut the bank’s outlook for gold prices in December, and then again in February, before recommending a short position on April 10. The bank’s 12-month forecast is for prices to reach $1,390 an ounce. The target for the end of 2014 is $1,270 and prices may drop below $1,200 temporarily, he said.
The International Monetary Fund April 16 cut its forecast for world economic growth from 3.5 percent to 3.3 percent, as central banks from the Federal Reserve to the Bank of Japan continued buying government bonds in programs known as quantitative easing that have pumped more than $5 trillion into the global financial system since 2008.
Gold’s price drop hasn’t changed billionaire Paulson’s intermediate to long-term outlook on the precious metal, said John Reade, partner and global strategist at Paulson & Co. in New York in a statement on April 15. Bond buying by governments will increase demand for gold even as the commodity is “going through one of its periodic adjustments.”
Currie’s correct gold recommendation came as he celebrated his 17th year at Goldman Sachs on April 15. He joined the bank after earning his doctorate from the University of Chicago in 1996, and became a managing director in 2002 and partner in 2008. He moved to the New York office last year from London, where he worked since 2003 and served as European co-head of economics, commodities and strategy research from 2010 to 2012.
Investors who followed Currie’s recommendation on gold would have earned returns of about 12 percent -- not the best call he’s ever made. In 2007, he made a bullish recommendation on oil that yielded 23 percent. The price of crude touched a 19- month low in January 2007 in New York before surging to a record $147.27 a barrel in July the next year. Another bullish recommendation on a basket of commodities in 2011 yielded 23 percent, while a bet on higher oil in 2012 lost 36 percent.
In 2007, “it was much more of a contrarian call,” than the recent one, Currie said. “We were fighting the tape in the sense that you had a substantial pullback in commodity prices into the first quarter of 2007. This time, if you look at a chart, gold was trending downward consistently, so this was less of a contrarian call than ones we’ve made in the past.”
While futures averaged a record $1,671 last year, prices were already in a five-month slump through February that was the worst since 1997 and a month before Goldman Sachs advised selling the metal. Gold is now 28 percent below its September 2011 record.
Not all of Currie’s recommended trades are winners. The bet on higher copper prices that was recommended on March 1 has lost about $498 a metric ton, according to an April 16 report from the bank. Copper is about $7,080 a ton. Goldman Sachs said then that it was closing its crude, corn and industrial metals basket for a loss.
Other banks have also turned more bearish on gold this year. Societe Generale SA said on April 2 that the metal was in bubble territory and would fall to $1,375 this year, when it was $200 higher. On April 16, it advised investors to add to holdings at about $1,300 an ounce. Barclays Plc, Credit Suisse Group AG, Danske Bank A/S and BNP Paribas SA are also predicting lower average prices in 2014 than this year.
On April 16, Morgan Stanley lowered its 2013 gold forecast by 16 percent on April 16, and Bank of America Corp. removed its 2014 price target of $2,000.
Michael Coleman, founder and COO of Aisling Analytics, the manager of the Merchant Commodity Fund, said Currie is an “acknowledged guru,” and “one of the best analysts in the commodity space.” Coleman has been a client of Currie since around 2005.
“He does very solid work,” Coleman said. “We don’t always agree with him but he’s thought-provoking. He has a great ability to pull together short and long term factors into narratives and investment theses. We make our own investment decisions but we always want to hear other credible people’s views.”
“Unlike equities which are by definition regional, commodities are truly a global market,” Currie said. “That’s one reason why I’m on the road so much, because of that. It’s predominantly corporate players in the market, so I’m not going to places like Boston or Zurich. We’re going to places like Lagos and Johannesburg, as opposed to where the investors are.”
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