Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21
Bitcoin Halvings Price Forecast and Stock to Flow Analysis - 18th Jul 21
Dell S3220DGF Unboxing and Stand Assembly - 32 Inch 165hz Curved Gaming Monitor Amazon Discount - 18th Jul 21
What Does The Fed Mean By “Transitory Inflation” And Why Is It Important To Understand? - 18th Jul 21
Will the US stock market’s worsening breadth matter? - 18th Jul 21
Bitcoin Halving's Price Projection Forecasts Trend Trajectory - 18th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Goldman, Gold, And U.S. Dollar's Influence on Precious Metals

Commodities / Gold and Silver 2010 Apr 24, 2010 - 01:13 AM GMT

By: Przemyslaw_Radomski

Commodities

Best Financial Markets Analysis ArticleWhen gold declined last Friday we were not caught by surprise and neither were our Subscribers. Based on our technical analysis, we gave you a heads up two weeks ago when we said that gold was ready for a decline before resuming its upward climb. But sometimes news can rattle the market, which is what happened Friday when gold hit an air pocket and dove $25 in a few minutes to move very close (or slightly below) the levels mentioned in our Friday update.


While it is always the sell order (or rather a large amount of them) that causes a dramatic move, and one should not automatically assume that one single event is responsible for it (without giving it a second thought), in this case it seems that the immediate cause for the decline was news of the Securities and Exchange Commission’s (S.E.C.) civil fraud charges against Goldman Sachs.

You might be scratching your head wondering why such an event would affect the price of gold? Intuitively, one would reason that since gold is a hedge against financial-sector risk, gold would shoot up in reaction to such news instead of diving down. In times of uncertainty, investors turn to gold as a hedge against inflation and unforeseen crisis, gold being one of the very few asset classes that is not someone else's liability. But Friday, investors lost their risk appetite and dumped all commodities in favor of the U.S. dollar.

The full story of what happened with Goldman Sachs is complex and the media hasn’t done a great job explaining it. In a nutshell, the S.E.C. is charging that Goldman created and marketed securities based on a group of subprime mortgages that were deliberately designed to fail.

 Why would they want to do something like that?

Obviously somebody was going to make a lot of money from it. That someone - as it is expected - was the super-savvy hedge fund firm of Paulson & Co, the world’s third largest hedge fund. According to the S.E.C., Goldman failed to disclose to investors the role played by Paulson & Co in the construction and design of that particular security. Paulson & Co helped choose securities for this investment and then wagered (successfully) that it would fail. In other words, Paulson & Co, worked with Goldman to pick the assets that went into the security, allegedly choosing the riskiest. Then, Goldman sold these securities to its clients, who readily bought because of their triple-A rating. (Someone should look into how they got this triple-A rating.) Mr. Paulson then placed bets that the security would lose value.

We took a look at the Goldman Sachs website, specifically at a section called their “business principles.” There were 14 listed. Let’s look at the first and the last. The first says: “Our clients' interests always come first.” (I guess they meant the BIG client, like Paulson& Co) The last principle says: “Integrity and honesty are at the heart of our business.” (No need to comment on that one.)

Paulson & Co said its role in helping to design a mortgage-linked deal sold by Goldman Sachs Group Inc. was “appropriate and conducted in good faith,” according to a letter sent to investors.

If you’re still wondering what all this has to do with the price of gold, we’re now getting to that part. Obviously anyone sharp enough to see the coming of the subprime fiasco and intelligent enough to make billions of dollars from it is one savvy investor. Further proof for us at Sunshine Profits that John Paulson is one smart dude is the fact that Paulson’s firm is one of the world’s largest investors in gold. His holdings of the SPDR Gold Trust (GLD), valued at $3.6 billion, make his firm the largest holder of that ETF -- representing 15% of his portfolio. Among his other top ten disclosed positions is the AngloGold Ashanti LTD (NYSE:AU) gold mining stock. His ownership of that stock totals $1.7 billion and represents around 7% of his holdings.
 
Even though Paulson & Co. was not charged by the S.E.C., the sheer mention of the firm in connection with the suit against Goldman was taken to be negative news for gold.

The thinking might have been that investors in Paulson's hedge fund may rush to redeem their shares in the fund, thereby forcing it to sell some of its gold holdings. That argument does not make sense. First of all, most hedge funds require at least a 30-day notice to cash out. Even if the deal Paulson made wasn’t exactly ethical, it still made his investors a spectacular bundle of money and the S.E.C. did not press any charges against him. So where is the risk for his investors?
    
Even if, for the sake of argument, many investors would rush to the exit doors to redeem their shares in Paulson's hedge fund, and as a result the fund would have to sell some of its gold holdings, how would that affect the precious metals market?
 
Writing this week for Marketwatch, Mark Hulbert crunched some figures.

“For argument's sake, let's assume that Paulson's gold holdings, both physical gold as well as shares of gold mining companies, represent a total of about 30% of his overall investments and are worth around $10 billion. Let's further assume that 10% of the investors in Paulson's fund suddenly get cold feet and ask for their money back.
 
Given my assumptions, that would lead to the sale of $1 billion of gold and gold shares -- or 0.37% of the total worldwide market cap of gold mining companies and gold owned by ETFs. Not exactly good news, but not particularly momentous, either -- especially since hedge fund investors typically can't get their money back immediately but have to wait a while after indicating their intent to redeem.”

Even though it seems that the Goldman-linked SEC case caused the price of gold to dive last Friday, we believe it was only a catalyst to the technical correction that we predicted was coming in any case. We wrote in the last two Premium Updates that gold, which rallied to a four-month high of $1,170.70 on April 12, was poised for a technical correction. So, it seems to us that the Goldman news most likely just triggered an exit opportunity for short-term traders to lock in profits. If we look at the large picture, a blip like the Goldman Sachs story won't make a difference in the long-term inevitability of the gold bull market.

We found it interesting that upon hearing the news about Goldman Sachs, nervous investors would dump gold for dollars. We have written in previous Premium Updates about the mountain of debt accrued by the U.S. government and what it will mean for the long-term value of the U.S. dollar.

Speaking of the U.S. dollar, let’s take a look at the current situation in the USD Index (charts courtesy by http://stockcharts.com.)

In our previous report we wrote the following:

There has been only a very small reaction to the USD weakness.  Gold has recently been consolidating and this means that these may move a bit lower before the bottom is in. This holds true for silver and other equities as well.
 
We felt that the USD would move slightly higher but that its weakness would cause relatively little downward pressure on the precious metals sector.  This is exactly what happened over the past seven days as the USD approached its March highs but gold did not respond by moving close to its recent lows.  The same held true for silver.  So, although the recent decline might have appeared huge on a day-to-day basis, taking a broader perspective reveals that on a relative basis very little downward movement occurred in the PM markets. 

This is a very positive sign for PM’s as the USD is one of the key drivers for PM prices and the rally seen this week had little negative effect on PM’s.  We are bullish at present although we do not expect immediate upward movement in gold, silver and mining stocks. 

The USD is approaching a resistance level at the 50% Fibonacci retracement of the 2009 decline as well as a previous stop.  This may hold this rally in check.  However, the PM markets remain strong.  Even if we do see another increase (which we don't expect at this point), say to the 83 level, though unlikely, we do not expect a severe decline in PM prices. The USD will eventually, in our view, move lower.  This will in turn cause the PM prices to rise strongly as there will be no downward pressure from the USD when its decline begins.  Whether this happens in one week or two is unclear at this time but we believe that the decline in the USD is in the cards sooner or later.

Summing up, based on the analysis of the U.S. Dollar Index, we remain bullish on gold, silver, and mining stocks in the medium term.

The USD rally is likely to slow and soon come to an end.  Gold, silver, and mining stocks, having shown strength during the recent USD rise, are poised to surge upward once the current USD rally ends.  Should the USD rally continue in the coming week, expect continued minimal declines in the PM sector as its strength continues to hold prices in patterns similar to recent weeks.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski
Editor
Sunshine Profits

    Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

    Sunshine Profits provides professional support for precious metals Investors and Traders.

    Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free trial to see if the Premium Service meets your expectations.

    All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

    By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Przemyslaw Radomski Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in