Goldman's Golden Message: Time to Short the Shiny Stuff

Polya Lesova, a reporter for MarketWatch wrote an article after the market close yesterday that discussed in part gold's loss of over $42 this week. What caught my eye in this article was a November 28th report that Goldman Sachs analysts came out with that talked about five of their top ten trades for 2008. Here is an excerpt from the MarketWatch article.

We would now use a short exposure in gold, expressed in U.S. dollars, to capitalize on a gradual relaxation of credit concerns in the financial sector over the coming months, and as an avenue to benefit from the prospect of a stabilization in the U.S. dollar, supported by a front-loaded Fed easing campaign, and the ongoing improvement of the trade balance.

There are some things I question about Goldman Sachs analysis.

First, I question what they mean by the stabilization of the US Dollar. The US Dollar has declined over 30% in value over the past 5 years versus the Euro and Canadian Dollar. Gold in that same time frame has gone from around $300/oz to around $800/oz today. Continued rate cuts by the Federal Reserve will only increase an already high inflationary environment and will reduce the appetite for low yielding US Treasuries from overseas countries.

Next, how is a "gradual relaxation of credit concerns in the financial sector over the coming months"a negative to gold? Before the sub-prime mortgage problems were brought to the market, gold rose in value. After the sub-prime problems were brought to the market, gold rose in value. Therefore I don't see how this point is relevant to a fall in gold prices.

With the end of the year approaching, there will be less volume so expect wild swings in the stock and commodity markets. From the brief information supplied by the MarketWatch article, I disagree with Goldman Sachs analysis that people should short gold in 2008. There are too many factors that are positive for gold's continued rise next year.

As with most end of the year predictions, we shall see who is correct this time next year.

Comments

[ussmls7:]

Goldmans shorted SIV's to the world, I think I will stay away from thier advice.

2007 Dec 04 05:56 PM

[Neville M.:]

Funny you should mention SIVs as I wrote in my blog today about how these SIVs are a major issue in Florida's Investment Fund.

As for Goldman, I'm pretty sure they will hedge their bets so they come out looking good no matter what.

2007 Dec 04 09:01 PM

[Epic:]

Goldman is usually on the right side of the trade. I would be surprised if gold didn't move at all this forthcoming year

2007 Dec 05 04:02 AM

[ussmls7:]

Goldman may not move any where, they are clamming up on recent coments about there bundle sales, then shortting the market !

2007 Dec 05 06:58 AM

[jcrash:]

Why in the world would anyone trust this company's message on any investment? They are in it to MAKE MONEY not to MAKE YOU MONEY.

2007 Dec 05 02:14 PM

[Mr. Peanuts:]

The investors/traders on this thread seem to have forgotten that the price nature of commodities is extremely volitile.

For Goldman to call a short on gold for 2008 is a bet that comes at a very low risk premium. With the global economy slowing into the next year, it would be quite reasonable to sell the gold rather than to buy it.

2007 Dec 05 02:53 PM

[jcrash:]

I can make you a cogent argument either way. What I know for sure is that GS makes calls on what profits it most, not what is most likely to happen.

2007 Dec 05 05:14 PM

[GaryD:]

I agree that GS makes a habit of putting out misleading reports. Their SIV dealing would be criminal if they weren't so well connected. I'm still worried about gold, though. The central bankers and affiliated banks like GS have a vested interest in manipulating gold's price. It wouldn't surprise me to see them drive gold down by, for example, dropping the lease rates on gold. They did this in October and November. I firmly believe that gold is an excellent long-term insurance policy on my money.

2007 Dec 06 12:55 AM

[GaryD:]

I agree that GS makes a habit of putting out misleading reports. Their SIV dealing would be criminal if they weren't so well connected. I'm still worried about gold, though. The central bankers and affiliated banks like GS have a vested interest in manipulating gold's price. It wouldn't surprise me to see them drive gold down by, for example, dropping the lease rates on gold. They did this in October and November. I firmly believe that gold is an excellent long-term insurance policy on my money.

2007 Dec 06 12:55 AM

[Neville M.:]

gfginvestments,

I'll counter your argument with this, if you feel the economy will slow, the Federal Reserve will try to stimulate the economy by continuing to cut rates. We have high inflation now, cutting interest rates won't help that.

Also, at some point people won't want to buy our low-yielding debt and will want to invest in other assets. We're seeing this already.

2007 Dec 11 09:36 PM