Could Wall Street Be Wrong On Gold Again?

It seems as if all the major Wall Street institutions are bearish on gold, even after a 2+ year bear market and a major pullback.  At first glance you might be a little discouraged by reading major bank after major bank release a lower forecast on the price of gold for 2014 and beyond.  But knowing their track record of forecasting the gold price you might feel a lot better, and even see the possibility of a contrarian trade forming.

Let’s flashback to August 2011 when gold was about to make its latest high.  As you can see by this article published by Reuters, the major banks were RAISING their gold price forecasts for 2011 and 2012.  This was right when gold was making a major top!  Sentiment back then was bullish on gold, and gold was one of the only things going up.  Little did Wall Street know it was 100% wrong on the gold price, but like so often happens in markets it turned out to be a herd opinion that was wrong.  Unlike today though this time it was a herd opinion in the bullish direction.

Goldman Sachs got a lot of attention  for the slam dunk sell call on gold in late 2013.  Goldman didn’t really turn bearish on gold, however, until sometime after January 2013 (according to public press releases).  Here’s what appeared in the press:

• November 2011:  Goldman Sachs ups gold, silver price forecasts
• May 2012:  Goldman Stands By Gold-Rally Forecast Even As Price Drops
• December 2012:  Goldman Sachs cuts gold outlook, sees growing risk (Goldman only cut its 2013 forecast for gold to $1800 at this point, which was still HIGHER than the price of gold in December 2012)
• January 2013:  Goldman Forecasts Gold Rally Amid Debt-Ceiling Confrontation (“We see current prices as a good entry point to re-establish fresh longs” was a quote from this article.  Meanwhile gold was about to embark on a severe downleg that punctuated its bear market.)
• February 2013:  Goldman Sachs Turns More Bearish On Gold (this is about the same time the major cuts to gold price forecasts appeared for other Wall Street banks)

The point of all this is the gold bear market started in September 2011.  But the major banks didn’t get bearish on gold in large part until 2013, well into the bear market.  The final crash in the gold market actually occurred over a 3-month period in 2013, from April to June.  So the major banks that turned bearish on gold in early 2013 did get the final crash right.  But what’s interesting to note is by the time everyone got bearish on gold and dumped their GLD positions, gold was getting very close to its bottom.

Even after the final crash most Wall Street banks have held onto their bearishness in gold, forecasting lower prices for 2014.  In the meantime gold has formed a 6-month base and potential double bottom from June 2013 to January 2014.  Only time will tell if this base holds, but as the saying goes “the bigger the base, the stronger the case”.  Will the major Wall Street banks be wrong early in a new gold bull market just as they were wrong early in the last gold bear market?

The gold miners have recently started to firm up the case for a new bull market in gold.  After rallying strongly over the last few weeks, the number of gold stocks in a Stage 1 base has increased dramatically to over 40% of the stocks tracked below.  The data also shows the number of stocks that are basing in Stage 1, or advancing in Stage 2, now is about equal to the number that is still in a Stage 4 decline.  This is a bullish omen, especially since gold stocks tend to forecast major turns in the gold market.

Stage Analysis Of Gold and Silver Mining Stocks

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