Short gold in '08, Goldman says

Globe and Mail Update
November 29, 2007 at 3:03 PM EST

Gold bugs have mostly had it all their own way this year, but that won't be the case next year, Goldman Sachs Group Inc. believes. In fact, the big brokerage firm recommends in its top 10 trades list for 2008 that investors short gold next year.

Goldman had recommended investors go long gold in its top 10 trades list for 2006 and bullion went from around $500 (U.S.) an ounce to $650 at the end of that year. Bullion has continued to climb since. This year it rose from $636 at the beginning of the year to as high as $845 on Nov. 7 and is currently changing hands at aound $795 on the London Metal Exchange.

But the 2008 top trades list, drawn up by Goldman's global markets team, suggests investors short gold priced in U.S. dollars in order 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 the U.S. dollar stabilizing. Bullion has been one of the main beneficiaries of the financial turmoil that began in August as investors sought alternative stores of value to the weakening U.S. dollar.
(A short sale occurs when the seller borrows a stock, commodity or currency and sells it, expecting the price to fall. If it does, the seller buys it at the lower price to replace the commodity that was borrowed.) The team anticipates that the greenback, which had a tough time in 2007 against global currencies including the Canadian dollar and the euro, will find its footing next year as the U.S. Federal Reserve Board cuts interest rates and thereby lowers the risk of a recession, and the U.S. trade balance improves further.

The team also makes its argument for shorting bullion on the basis of technical analysis. That, the team says, suggests that gold is topping out and that longer-term momentum indicators are turning lower. “We see scope for acceleration through $770 to re-test the $600-650 levels prevailing ahead of the summer,” the team said.

The team also suggests investors short small capitalization stocks and go long large caps and opt for stocks from a variety of countries, given the risk of choosing stocks from just one country.
Another of the top 10 trades for next year is to short 10-year Canadian bond futures and go instead for 10-year Swiss franc bond swaps as the rate differential between the two has gotten out of whack.

A further one is to go short the British pound and long the Japanese yen to capitalize on the expected slowing of the British economy.

“Sterling remains one of the most overvalued major currencies” in Goldman's trade-weighted valuation metric while the yen is comparatively cheap, the team said.

“On top of this, the narrowing of interest rate differentials between Japan and other major industrialized countries, including the U.K., make Japanese yen funded carry trades less attractive,” the team added.