“I’m A Fan of Gold”—Seth Klarman Supports ‘Prudent’ Positioning as Goldman Hikes Precious Metal Price Target
The comments below are an edited and abridged synopsis of an article by Tyler Durden
Billionaire Seth Klarman of Baupost Group says he’s a fan of gold, and that it’s valuable in a crisis. Goldman Sachs believes a wealth shock has subdued gold’s rally, and raised its target price for gold to $2,500.
While it’s tempting to blame gold’s recent weakness on lack of investment demand due to higher US rates, the selloff is in line with a weaker yen and reflects the effect of lockdowns on the Chinese economy. The PBOC allowed for some yen depreciation to ease financial conditions and as the yen dropped, gold followed it lower.
This negative wealth effect for gold was amplified by a liquidation of short-term-oriented futures and ETF positions, which are sensitive to trends in the US dollar. In turn, the gold real rates correlation remains broken as higher real rates now go hand-in-hand with greater fear of a recession, which is positive for gold investment demand.
Reversal of the wealth shock will allow focus to shift back to fear and geopolitical drivers: The wealth shock to gold will reverse as China comes out of lockdowns with growth set to get a boost from policy support, and an increasing lack of confidence in a US soft landing should boost fear demand for gold.
Any transparency on Russian gold purchases should raise the market’s conviction on an upcoming structural geopolitical boost to central bank gold demand, so the bullish gold case has been delayed, not derailed.
Gold ETF purchases should resume now that the speculative part of positioning has been cleared. The risk is a continuation of the wealth/liquidity shock until its magnitude matches that of March 2020 or October 2008. This could lead to a temporary fall in gold as market participants cut positions to increase their dollar liquidity and meet margin calls.
Klarman says: “If the world turns to hell, the war expands and gets worse, God forbid a nuclear weapon is used, I think people are going to say: ‘How do I know what anything’s worth anymore? I’m going to make sure I have some gold because I don’t want to not have money at a time of desperation.’”
