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Goldman Sachs has issued advice that will give investors in the precious metals sector pause: the dreaded 'stop and reverse' strategy. Not only did the Goldman team recommend selling gold holdings Wednesday, they also advocated a short position for the remainder of 2013.
Noting that the "turn in gold prices is accelerating," Goldman Sachs lowered its gold price forecasts to $1,450 (U.S.) per ounce for 2013 and $1,270 for 2014. The strategy team is now suggesting a short position on the bullion price as one of its top trade ideas for the year.
Projections are based on optimism that the U.S. economic growth will accelerate through the year and push the U.S. dollar higher. Because gold is valued in greenbacks, the price of gold would fall.
From current levels, the expected return on the short would only be nine per cent in light of the price forecasts but the report also pointed out:
"Should our expectation for lower gold prices continue to prove correct, the fall in prices could end up being faster and larger than our forecast, as aggregate speculative net long positions across COMEX futures and gold ETFs remain near record highs."
Futures data indicates that indeed, the recent weakness in the gold price has yet to put a significant dent in optimism (see chart). Bullish futures positions are lower than during the crisis years, but remain above historic average levels.
The DXY Index – the U.S. trade weighted dollar – will be the best way for investors to gauge the ongoing success or failure of Goldman's strategy. The stronger the dollar index, the more correct they'll be.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.
Scott Barlow