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.