So much for the Masters of the Universe. Following the extremely bearish start to the year, Goldman Sachs has already had to ditch five out of six of its “top trades” for 2016. Strong dollar? The US currency has stalled. Rising US inflation hopes? Not now that everyone’s stressing about deflation. Tighter “spreads” between Italian and Germany bond yields? Not with the state European banks are in.
The investment bank fudged its withdrawal by noting that these were short-term trades and it still thinks its rationale will turn out correct in the longer run – but it just shows that market timing isn’t easy, even for a bank whose alumni run half of the world’s central banks.
It also shows the dangers of running with the herd. Betting on a rising US dollar has made a lot of logical sense for a very long time – the US was planning to raise interest rates, while Europe and Japan were clearly planning to cut. But logic only gets you so far in markets. With everyone on the long side of that trade, it was only a matter of time before it stalled.
Now that it has, you can see investors starting to wake up to the equally logical reasons for the dollar to weaken – the Federal Reserve stepping back from further rate rises against a troubled global economic backdrop, for example. It’s one of the many reasons it pays to be contrarian – it encourages you to take a sceptical view of the prevailing narrative, and seek out all the reasons why the things that everyone believes might turn out to be wrong.
On that note, it’s nice to see that one utterly despised asset class that we were being very bullish about just as Goldman was coming up with its 2016 forecasts has done rather well amid the havoc of the last few months. At the start of December, Edward Chancellor wrote about the capital cycle for us. Specifically, he reckoned that gold miners were finally worth buying, having endured sufficient pain to encourage them to cut supply, tighten up efficiency and get rid of the bloat that had accumulated during gold’s long bull market.
Among the tips our resources specialist Alex Williams recommended were Randgold Resources (up around 38% since), and the BlackRock Gold & General (up 26%) and Tocqueville Gold funds (up 13%). Meanwhile, Dominic Frisby’s Pan African Resources tip has almost doubled (he suggests selling half).
Nothing goes up in a straight line, so no doubt some of those gains will be given back if the market stops panicking at some point. But with central banks apparently doing all they can to drive the gold price higher (and if you’re up in arms about a potential ban on cash, make sure you sign our petition), we’re happy to stick with gold miners in the longer run.