Goldman Sachs' downbeat report on gold is getting a lot of credit for bringing down the price of gold on Wednesday. Bullion was recently seen at $1559 (U.S.) an ounce, down nearly $28.
But should the word of gold analysts be taken so seriously?
Their track record in recent years has actually been fairly good, largely because they failed to buy into the hype during gold's rise to record highs two years ago. When gold touched $1,900 an ounce in 2011, analysts' price targets lagged by a considerable margin.
In September 2011, the median average target price for 2013 was just $1,446 an ounce – or about $450 below the actual spot price, according to Bloomberg, but not far from where the price is today.
The problem is that analysts turned more bullish soon after, leaving them with price targets this year that appear wildly out of place with gold's current price. Today's median price target for 2013 is $1,700 an ounce – or about $160 above the actual price.
In the case of Goldman Sachs, the investment bank appears to be doing some catching up with reality, rather than embarking upon a brave new outlook for gold – despite the fact that its updated targets have carved out some big headlines on Wednesday.
The investment bank now sees the price of gold averaging $1,545 (U.S.) an ounce in 2013, down from an earlier forecast of $1,610. The price in 2014 is expected to fall to $1,350, down from an earlier forecast of $1,490.
The update puts Goldman Sachs at the lower end of analyst targets. Earlier this month, Société Générale reduced its year-end target for gold to $1,375 an ounce from $1,500.
Any revision to a price forecast usually means the analyst either got it wrong or has been deluged with new facts that have made the initial calls out of date.
In the case of the Goldman Sachs call, the former appears to be the case: "Despite resurgence in euro-area risk aversion and disappointing U.S. economic data, gold prices are unchanged over the past month, highlighting how conviction in holding gold is quickly waning," they said in a note.
Meanwhile, gold producers that had underperformed the price of gold on the way up seem inclined to underperform on the way down, too.
With gold down 1.7 per cent on Wednesday, stocks in the NYSE Arca Gold Bugs index were down 3.4 per cent, or double the decline. And Barrick Gold Corp. is a particular standout: Its share price slumped 6.6 per cent.
David Berman