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Goldman Brings Down the Party

Stock-Markets / Financial Markets 2010 Apr 19, 2010 - 09:47 AM GMT

By: Miles_Banner


Best Financial Markets Analysis ArticleThe headline news of the week did not fail to deliver. Like Tiger’s recent life between the bed posts, the markets quickly fell flat after months of posting impressive results.

‘SEC takes off the gloves on Goldman’ reads a headline from the Financial Times…

The gold price was under selling pressure from the beginning on Friday. That pressure increased as the news hit that Goldman Sachs, the hugely popular investment bank, was accused of fraud by the Securities and Exchange Commission (SEC).

In what many in the markets are calling the canary in the coal mine, the SEC are showing a front against the banks. The ‘War on Wall Street’ has finally kicked off.

The Financial Times reported…

"The evidence paints Goldman’s role in an excruciating light. To entice in end investors, the bank persuaded an independent credit adviser, ACA Management, to lend its name to the transaction. ACA did so on the understanding it obtained from Goldman that Mr Paulson was to take a long position in the securities. This was not the case."

In fact Mr Paulson, as part of Paulson & Co, helped in choosing the mortgage securities that made up the CDO (Collateralized debt obligation). They then took out a large short position (betting that it would fall in value), and, with the help of Goldman Sachs, brought it to the market. It’s the equivalent of choosing a donkey to run in the Grand National and betting against it winning.

Within months 99 percent of the mortgage loans that made up the CDO, had been downgraded yielding Paulson & Co a profit of $1bn.

Of course Goldman stood defiant; brushing off the claims and insisting they had not stated Paulson had a long position in the CDO. They did, however, fail to point out whether they had disclosed Paulson’s involvement in the setup and their subsequent short position… a central part of the accusation.

By the time Goldman had pieced together a response, $12bn had been wiped off their share price. They closed nearly 13 percent lower on the day.

Goldman Brings down the Party

No one’s saying the party is still going on at Wall Street, but people left at the end of a party are usually the ones who’ve had the least fun.

The SEC has pulled out the big punch. Many are predicting there are more to follow.

News of the allegations had wider implications for the markets. Earlier in the week the VIX index had touched 15.23 – a low not seen since July 2007. As news of the SEC’s accusations reached investors it leapt to 19.36, indicating fear had re-entered the market.

This was played out in a broad sell off of gold and oil as investors, once again, sought the safe of the US Dollar (USD) and the Japanese Yen (JPY).

The gold price fell 22 dollars on Friday and 2.2 percent over the week, closing at $1,136 an ounce. The oil price fell 2.1 percent over the week, to $83.13 a barrel.

Equities, also felt the brunt of investors escape from risk as the S&P 500 dropped 1.6 percent on the day after creeping to 18 month highs recently.

Fears grow that China is Overheating

Elsewhere news that the Chinese economy grew by 11.9 percent in the first quarter compared to a year ago fed the fears that they may take more measures to tighten monetary policy. On the back of this the Nikkei finished lower for the week.

Investors still fear that the Chinese economy is in danger of overheating.

The UK debate kicks off

In the UK we’re glued to televisions, watching the first ever live televised debates between the main party leaders, as they fight it out to convince a disillusioned public that they can steer the UK out of economic trouble.

The UK’s continuing indecision over its future political party hampers any strength in the pound.

In Summary

If we take a look at gold prices today we still see plenty of reasons still to be bullish. The Greek Crisis continues to unfold. The SEC is taking a tougher stance on Wall Street which will trigger more flights from risk. And the pound also continues to find no strong foothold to push higher. The only plausible alternatives remain the Dollar and the Yen. But how long will it be before they too face a crisis of their own? And if/when they do gold will be in demand once again.

Gold Price Today

P.S Digger writes a weekly email analysing the gold price and the gold industry. Visit Digger at Gold Price Today (

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