Gold's going up, gold's going down: Major investment banks disagree - Wealth Managers

Barclays, JPMorgan, and UBS all see upside, at least for the near term

Several big investment banks have upgraded their outlooks on gold after the Federal Reserve last week made its shocking announcement that it wasn't ready to taper its $85 billion monthly bond-buying stimulus program.

Conversely, some other firms say the economy is improving and therefore tapering is inevitable, so gold is headed down.
JPMorgan goes long
JPMorgan surprised markets in its own right by issuing a buy call on gold:
"This week's surprise by the Fed in not tapering their asset purchases led to a 5% rally in precious metals. In our view, the main driver of gold's performance over the past five years has been QE. Following the 2008 crisis, the unprecedented expansion of central bank balance sheets led to fears of inflation further down the road and resulted in very strong demand for gold, a large amount of which came via ETFs.

"As QE continued and inflation expectations remained subdued, this demand for an inflation hedge subsided, ETF positions were unwound and gold prices fell. Along with precious metals rallying, inflation breakevens widened following the Fed announcement, another indication that uncertainty around future inflation may pick up as a result of the Fed's volte-face on tapering.

"Additionally, positions are much cleaner now, following the unwinding of ETF positions, and physical demand from retail buyers in Asia has been very strong.

"We open a long position in gold." 
Barclays raises its forecast
Another bull, Barclays Research, said gold could rise to $1,482 as soon as October under a delayed tapering scenario, averaging $1,463 in the fourth quarter:
"Our rates strategists have revised their forecast for 10y USTreasury yields lower to 2.85% in Q4 13 (from 3.1% previously), due to the dovish signals from the Fed about the pace of policy normalisation. Also, they do not think the rates markets will question the path as laid out by the Fed, at least in the near."

"According to our economists, a recent set of solid macro data, combined with a dovish Fed, will likely continue to support risk assets in the near term. This coming week will include data releases such as consumer confidence, durable goods orders, new home sales, and the second release of Q2 GDP, from which we can gauge the aforementioned continued support of risk assets, especially equities, which in turn could provide an external market effect on gold." 

"The elephant in the room is the U.S. debt ceiling"
UBS also raised its one-month target, to $1,405 from $1,250, and its three-month target to $1,375, from $1,350. "The latest euphoria in gold could continue in the coming days as speculative investors liquidate their short positions in futures and options further," said analysts Dominic Schnider andGiovanni Staunovo. "A test of the upper bound of our three-month trading range of $1,425 cannot be ruled out, especially with the Chinese market returning this Monday from a long weekend and the U.S. debt-ceiling debate coming into focus."

A couple of other analysts outlined the case for higher gold in a CNBC report. Compass Global Markets CEO Andrew Suhas an end-month target of $1,450 for gold and an end-year target of $1,580. "The elephant in the room is the U.S. debt ceiling," Su said. "The fact the Fed has delayed the tapering of stimulus is a double-edged sword. It is in effect recognition by the FOMC that all is not well with the U.S. economy."
Ultimate Wealth Report's Moneynews editor, Sean Hyman, agreed: "We'll have the debt-ceiling issues coming to a head again soon and so it's probably safer for the Fed to keep things as they are now between now and the December meeting. I expect gold to hit $1,500-$1,570 in the coming months."
Gold bears see improving economy
On the bearish side are Citigroup Inc. and Morgan Stanley, which said the Fed news will give gold only a short-term bounce.

The price could fall below $1,250 before year's end as economic data strengthens and investors expect the Fed to start reducing its asset purchases, Citigroup analysts Ed Morse and Heath Jansen said. Morgan Stanley expects gold to average $1,200 to $1,350 in the coming year before trending lower, it said.

It's important to note that this pessimistic gold forecast from Citigroup is not shared by everyone in the conglomerate. Strategist Tom Fitzpatrick is a vocal gold bull. He recently told King World News:
"Within the gold dynamic, we believe this recent correction was very similar to what the gold market witnessed from 1974 to 1976 -- as the equity markets recovered from the bear market bottom in 1974. In this instance, very recently gold went 14% below the 55-month moving average, exactly as it did back in 1976.

"After the low in gold in 1976, the equity market peaked four weeks later. So far, following the $1,181 low in gold, the peak in the equity markets has been five weeks thereafter. And as we started that historic upward movement in gold, beginning in 1976, this was also when the equity market peaked and went into a corrective phase, and that is when gold really came into its own.

"So we believe we are back into that track where gold is the hard currency of choice, and we expect for this trend to accelerate going forward. We still believe that in the next couple of years we will be looking at a gold price of around $3,500." 
"This looks like to me like 2007 all over again"
The above bearish forecasts are based on optimism about the economy, and indeed, if you are optimistic about stocks, then you might well be pessimistic on gold. But a former chief economist for the "bank of central banks" -- the Bank for International Settlements -- recently told London'sTelegraph newspaper that the current global economy remains as vulnerable as ever.

"This looks like to me like 2007 all over again, but even worse," said William White, now chairman of the OECD'sEconomic Development and Review Committee. "All the previous imbalances are still there. Total public and private debt levels are 30% higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle."

"White said the five years since Lehman have largely been wasted, leaving a global system that is even more unbalanced, and may be running out of lifelines," the Telegraph report said. "'The ultimate driver for the whole world is the U.S. interest rate, and as this goes up there will be fall-out for everybody. The trigger could be Fed tapering but there are a lot of things that can go wrong. I very am worried that Abenomics could go awry in Japan, and Europe remains exceedingly vulnerable to outside shocks,'" White said.

"The world has become addicted to easy money, with rates falling ever lower with each cycle and each crisis. There is little ammunition left if the system buckles again. 'I don't know what they will do: Abenomics for the world I suppose, but this is the last refuge of the scoundrel,' he said."
To taper or not to taper: Fed is caught in a trap
Indeed, the Fed is in a "double-bind," wrote "Of Two Minds"economic blogger Charles Hugh Smith:
"The Federal Reserve is in a classic double-bind: as its policies to boost growth bear fruit, interest rates rise, threatening the very recovery the Fed has lavished trillions of dollars of quantitative easing (QE) to generate. Higher growth naturally leads to higher interest rates, which then choke off growth.

"If the Fed cuts back its money-pumping and asset purchases, interest rates will rise, as interest rates will seek a market level that isn't pushed to near-zero by the Fed's financial repression.

"Higher rates will choke off tepid Fed-induced growth. We already see home refinancing rates plummeting to 2009 recessionary levels.

"So the Fed risks blowing asset bubbles that will devastate the economy if it continues the QE pumping, but it risks killing the tepid recovery if it cuts back its pumping. Darned if you do, darned if you don't.

"Put another way: if growth is needed to boost corporate sales and profits, but growth leads to higher interest rates and reduced central-bank support of markets, this is a double-bind with no exit." 

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