Tuesday, April 23, 2013

It pays to follow winners

It’s being called the forecast of the year.  Goldman Sachs last week cut its gold-price view two days ahead of the start of the biggest decline for the commodity in three decades.  “So how did the investment bank manage to foresee a rout that others, including hedge-fund billionaire John Paulson, missed?” asked financial reporter Barbara Kollmeyer.  

The answer is simple: by the unsurpassed expertise of Goldman’s metals research team.  Say what you will about the sometimes scandalous history of the investment bank, there’s no denying its intermediate-term calls on gold and oil have been among the most accurate of any research department on Wall Street in recent years.

“You had a whole group of observations that should have created a substantial rally in gold prices, but they didn’t,” Jeffrey Currie, the head of Goldman’s global commodities research team told Bloomberg  in an interview a day prior.  “The fact that gold did not rally on Cyprus amid the bad U.S. data that occurred in that time period created the conviction we needed.”

The week after Cyprus announced a levy on bank deposits that shocked the investment world, gold rose 0.3%. On April 10, Goldman cut its 2013 forecast to $1,545 an ounce from $1,610 and its 2014 forecasts to $1,350 from $1,490. In February, Goldman slashed its 2013 forecast to $1,550.  Goldman made a further move on Tuesday, in the wake of the huge gold slump, to cut its short-term gold call to $1,400, and said it likes natural gas as a better safe haven.  

For the past five years, Goldman’s highest conviction trades involve being long gold and short natural gas.  Now that both trend have reversed, the firm says it now recommends that its clients short gold and go long natural gas.  Below is a graph from a recent Goldman Sachs gold analysis which supports the bank’s bearish view on the yellow metal.

In the February 26 report I made the following observation regarding Goldman’s gold call:

“You may be wondering why Goldman Sachs’ latest report on gold is considered newsworthy.  While big financial institutions release forecasts on gold and commodities on a regular basis, Goldman Sachs has a long-standing reputation for accuracy in its forecasts which far exceeds the industry standard.  To put it in colloquial terms, when Goldman speaks investors should listen.”

This was based on years of observation that Goldman’s commodity predictions tend to be spot on.  If you’re an outsider to the gold industry (most of us are), it’s always a good idea to follow close in the footsteps of those insiders who have a proven track record of choosing the correct investment path.  Goldman Sachs is one such path leader and its latest gold market victory has once again solidified its reputation as one institution whose pronouncements shouldn’t be ignored.

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