Goldman (GS) calls bull on commodities (again)

Find on this link your very own download of the Goldman PDF out this morning (Tues May 24) saying loveydovey things about commodities going forward, but as a sample here's some of the script:

May 24, 2011

Turning more bullish as supply-shock concerns fade

Although near-term downside risk remains as markets adapt to a slower growth environment with supply-shock concerns fading, we now believe that the risk/reward once again favours being long commodities. Accordingly, we are shifting back to a near- to medium-term overweight recommendation, reiterating our long-term overweight and recommending fresh longs in oil, copper and zinc.


We remain structurally bullish commodities
Although we remain structurally bullish and have long argued the structural case for being long, timing does remain critical. This was evident in the recent market correction, which brought commodities down roughly 10% from their April highs. With prices now more inline with near-term fundamentals and price targets, we believe that the risk/reward once again favours being long commodities. Although the economy has likely shifted into a slower, but sustained, growth environment, we continue to expect that economic growth will likely be sufficient to tighten key supply constrained markets in 2H2011, leading to higher prices from current levels.
 
Raising oil price targets on persistent impacts from MENA events
We expect that the ongoing loss of Libyan crude oil production and disappointing Non-OPEC production will continue to tighten the oil market to critical levels in early 2012, with rising industry cost pressures likely to be felt this year. We are now embedding in our forecasts that Libyan production losses will lead to the effective exhaustion of OPEC spare capacity by early 2012. This raises our year-end Brent crude oil price forecast to $120/bbl from $105/bbl, our 12-month forecast to $130/bbl from $107/bbl and our end-2012 forecast to $140/bbl from $120/bbl.
 
Mid-cycle pause nearing a trough, creating upside to metal prices.
While a sharp decline in world economic growth remains a downside risk to commodity prices, we see the current slowdown in economic growth as part of a normal mid-cycle pause, partially driven by higher commodity prices, and therefore not a reason to expect commodity prices to decline substantially. Further, we believe that the recent evidence of economic weakness represents signs of a slowdown and not a downturn, which is reinforced by signs that Chinese metal demand has already returned with the SHFE-LME copper arb opening again, exchange inventories declining and the Shanghai copper forward curve moving into backwardation.

It then goes on to call long on things like copper gold and oil, but for me the most interesting call out of the Vampire Squid this morning is the new long call on zinc. Go read it for yourself to find out more.

What Goldman Sachs thinks about gold right now

If you want to read a copy of the nine page report out of GS yesterday then mail me (for some reason I can't get it to download into the normal filesharing site) but here's the text from the front page that gives the quickread of contents below the fold. Suffice to say that Goldman likes gold (and who am I to argue?).

Gold set to rally as events send US real interest rates lower 

Optimism over the state of the global economic recovery at the start of the year, which drove US real interest rates sharply higher – and gold prices lower – has been tempered by the ongoing events in the Middle East and North Africa (MENA) and Japan, sending the 10-year US TIPS yield down to near 80 bp, setting the stage for the next gold price rally.

We expect gold prices to rally toward our 3-month price target of $1480/toz, and continue to recommend a long gold trade. While the protests and threat to oil supplies in the Middle East and North Africa drove COMEX gold prices to a new record high of $1437/toz on March 2, the events in Japan have paradoxically sent gold prices back below $1400/toz despite the ongoing decline in US 10-year TIPS yields. Given the decline in US real interest rates, we see the recent retracement in gold prices as offering a good buying opportunity, and maintain our long gold trading recommendation as we expect gold to rally to our 3-month price target of $1480/toz.

We see strong upside to gold prices in the near term, but continue to expect rising US real rates to lead prices to peak in 2012. We expect gold prices to move higher throughout 2011, but continue to believe that gold at current price levels is a compelling trade, not a longterm investment. In particular, we expect that as US real interest rates rise with the recovery in the US economy, gold prices will likely reach a peak in 2012.

We expect gold to rally following the recent events, but the PGM outlook is increasingly tied to the speed of Japan’s recovery. The sell-off in PGM prices accelerated after the Japanese earthquake, with platinum prices down 5% and palladium prices down 9% this week. While PGM prices softened with the rise in oil prices accompanying the MENA events, the recent declines reflect the potential loss of autocatalyst demand from idled automobile manufacturing in Japan. Not only does Japan account for 12.6% of global automobile production, it also accounts for a large share of global industrial PGM consumption: 16.4% for platinum and 18.1% for palladium in 2010.

What does Goldman Sachs say about gold?

Find out by downloading the Goldman PDF report dated August 11th right here, but below find excerpts:

Gold prices have sold off on lower speculative positioning …

After rallying to a record high in June, gold prices have declined on a selloff in speculative futures positions and gold-ETF holdings. Although the sell-off in speculative positions might not be surprising given the rise to a record-high price and decreased concerns over European sovereign debt, it stands in sharp contrast to the movements in US real interest rates, which have fallen to near-decade lows.

… however significantly lower US real rates point to higher prices

Under our gold framework, COMEX gold market positioning tends to reflect US real interest rates, with low US rates driving a high level of net speculative length in gold futures. Consequently, the recent decline in gold net speculative length, even as 10-year US TIPS yields fall below 1.00%, suggests that the gold market is now oversold, and we expect increasing speculative long positions to carry gold prices back toward our 6-month COMEX gold price forecast of $1,300/toz.

Renewed quantitative easing measures by the US Fed would be an effective catalyst to drive gold prices higher

We expect the current low real interest rate environment to continue as our US economics team recently lowered their US growth outlook for 2011, with the implication that the US Federal Reserve will likely keep short-term US interest rates low through 2011. This should provide further upside support to gold prices and raise the upside risk to our current gold price forecasts. In addition, our US economics team also expects that the US Federal Reserve will return to quantitative easing measures in late 2010 or early 2011. We believe that a return to quantitative easing could act as a strong catalyst to carry gold prices to higher levels.

Now you know why John Paulson has been buying all that gold

It's called insurance.

This from Yves Smith's extended post on the SEC/Goldman headline-maker today. No better place than Yves' blog to get the inside track on this story:

"The SEC is now mounting a civil suit against Goldman against one of its Abacus trades, which was a series of synthetic CDOs used to take short positions in real estate. Interestingly, the deal in question was on behalf of John Paulson. Greg Zuckerman’s book on subprime shorts, The Greatest Trade Ever, indicated that Paulson wanted to take down the all the credit default swaps created through the CDO issuance process (which would typically leave him 95% short the par value of the CDO, since Paulson would put up the equity tranche, usually 4-5%). The SEC may have started with this transaction because the communications between Paulson and the SEC would make it easy to show the intent, that of putting crappy CDS in the CDO."

And by the way, if Paulson eventually has to liquidate holdings, today's $30/oz drop in gold is likely to be a mere hors d'oeuvre.
Not to mention Nadagold (NG).

UPDATE: Also recommended is Felix Salmon's take on the SEC charges, that gets to the heart of things and explains well.

UPDATE 2: The SEC complaint is here and it's explosive stuff. I'm on my second read-through and after a while it starts sinking in just how heavy this will be for GS. However I'm interested to know why Paulson is not a named defendant.

The trader mentality

An excellent article from The Epicurean Dealmaker this week linked right here. It's ostensibly about Goldman Sachs and its spokesman Lucas van Praag but don't let that put you off; it's far, far better than 99% of the tosh written about the vampire squid these days.

It also goes off on a few semi-sidebars. This one caught my attention in particular as it had me nodding and saying to myself "yup, that's why I'll never be a trader".

This is a trader's mentality. A trader never apologizes. A trader never admits he made a mistake. A trader never says he's sorry. To do so, in his mind, would be to admit weakness. Another trader could use such an admission against him in the next trade. By the same token, a trader never sits back and takes it. If someone attacks him, he attacks back, preferably in greater strength, to discourage similar attacks from his opponent or others in the future. Perceived weakness is blood in the water in trading, and it attracts other sharks.

At the same time, a trader understands that all other traders behave in the same fashion, and he should not take sharp elbows or direct attacks personally. After all, most trading is conducted among a relatively small number of firms, among a relatively small number of traders, all of whom know or know of each other. At the end of the day, you've gotta shrug off your wounds and bruises from the battles of today and get ready to trade with the same bunch of assholes tomorrow. No harm, no foul. No hard feelings.

Go read the note yourself, linked again just in case. Intelligent and educative.

h/t yves smith