What in the World Is Goldman Sachs Thinking?

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In the annals of investment banking, Goldman Sachs (NYSE: GS) deserves a chapter all its own. Seldom has a company been so reviled, admired, envied, and even feared.

Love it or hate it, there's no denying that Goldman Sachs is a force to be reckoned with. When Goldman predicted in the summer of 2006 that oil prices would surge to $100 and beyond, many Fools laughed. The laughing stopped when oil proceeded to do just that. And when Goldman followed up its $100 prediction with a call for $200 oil just two years later, not only did no one laugh -- they actually bid up oil futures, helping Goldman create its self-fulfilling prophecy. Almost.

As we know now, oil prices never did reach $200, and today they're sitting below even Goldman's $100 prediction. But that doesn't change the power of this banker's predictions to move markets.

Which way did he go, George, which way did he go?
Problem is, it can be devilishly difficult figuring out just what Goldman's predictions are -- and which way they'll push the markets. I aim to change that ... in two ways. Over on Motley Fool CAPS, I'm inputting Goldman picks wherever I can dig them up, cobbling together a picture that, while not wholly accurate, should at least give us a representative sampling of how well following Goldman's advice might work out for an investor over time.

Meanwhile, in this column right here, I'll be profiling Goldman picks with the most potential to move the market. Speaking of which ...

$200 oil redux
If you liked Goldman's advice on $100 oil, and hoped it would be right about $200 oil, then you're going to love what Goldman Sachs had to say last week: Oil's going to $110 in 2011 (pause for cheers from ExxonMobil (NYSE: XOM  ) shareholders).

On the other hand, if you've been waiting for natural gas to join the bull rally ... keep waiting. Goldman foresees a world bloated by excess gas for the "next few years." (Now pause for a few boos from Chesapeake Energy (NYSE: CHK  ) investors.) While it projects nat-gas resuming an upward trend in 2011, Goldman cut projections for average pricing next year by some 18%, predicting $6 per million btus of nat-gas-fired energy in 2010.

Quit it with the broken record -- let's break some records!
Does it sound to you like Goldman's in a rut? I mean, $100 oil – we've seen that movie before. $6 gas – same story, different day. When will Goldman tell us something new?

Well, try this prediction on for size. Maybe we've seen these kinds of prices on oil and gas before, but one thing we've never seen before – in all of recorded history -- is $1,400 gold. Yet that's just what Goldman predicted last week: Gold hitting $1,265 per ounce within six months, cresting $1,350 per ounce within a year, and moving well into the $1,400s in 2011.

Yep. If there's one thing Goldman is good at, it's making headlines, and it couldn't have picked a better time than now to grab people's attention with a bullish call on gold. After all, a resurgent U.S. dollar has helped to crater gold prices over the past few days. Already, we've seen SPDR Gold Shares shed more than 7% of their value in as many days. And individual gold miner stocks have fared even worse:

  • Newmont Mining (NYSE: NEM  ) is down 8.5%.
  • Kinross Gold tumbled 11%.
  • Yamana Gold (NYSE: AUY  ) lost 12%.
  • Goldcorp (NYSE: GG  ) , 13%.
  • Barrick Gold (NYSE: ABX  ) got punished worst of all, dropping 15%.

Yet here comes Goldman, defying conventional wisdom as it bravely pounds the "Don't Panic!" button. Goldman declares that now's the time to double down on your bets and buy gold as it tumbles -- hoping to profit as gold climbs to $1,300 and beyond. Meanwhile, here at the Fool, our very own TMFSinchiruna has done Goldman one better -- no, scratch that … it's closer to "$600 better." He predicts we will see gold rise to $2,000 an ounce in relatively short order, then keep marching upward from there.

As for me ... well, you know what I think about all this gold-plated nonsense. Three years ago I argued that "gold is constantly being dug out of the ground, increasing its supply and diminishing the value of existing gold -- whereas stocks increase in supply and value over time." In published research, Wharton Professor Jeremy Siegel demonstrated how between 1802 and 2001, the value of $1 invested in gold actually declined 2% as its supply increased. Meanwhile, $1 invested in stocks 200 years ago increased in value nearly 600,000 times.

Foolish takeaway
Granted, the past few years have seen this relationship reverse as the stock market imploded and gold prices exploded. So maybe Goldman's right when it predicts $1,300 gold next year. Heck, maybe TMFSinchiruna is right about gold going to $2,000 and beyond.

I just don't buy it.

As always, though, you're free to disagree. Click over to Motley Fool CAPS now and tell us your favorite way to play the Goldman upgrades.

Fool contributor Rich Smith does not own shares of any company named above, but Chesapeake Energy is a Motley Fool Inside Value recommendation and the Fool owns shares of it. The Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 10, 2009, at 7:59 PM, busterbuddy wrote:


    Meanwhile, $1 invested in stocks 200 years ago increased in value nearly 600,000 times

    Well whose was around 200 years ago. And $1 invested in 2000 via the philosophy of indexing with S&P 500 yelled by Fool ain't worth a $1 today. Chinese banks are now providing the average Chinese a savings account denominate in Gold.

    I know the speculation fever of commodities and longer term investing. But today the Thiefs are the market makers and they are stealing your money daily. Stocks are just paper. Gold ain't.

    So best watch your step and accumulate Gold. Else Madoff will Make off with your paper. Be in Stocks or not. Of course if you buy a Gold ETF how do you know that the Gold is really stored somewhere. Maybe State Street are liars too. Well now might that not be interesting. Paper looks good.

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