Golds upward momentum suddenly thwarted by Wall Street news about Goldman Sachs
After several sessions during last week the gold price continued to exhibit signs of strength when suddenly, on Friday, the SEC charged Goldman Sachs and one of its vice presidents for defrauding investors "by misstating and omitting key facts about a financial product tied to sub-prime mortgages," the SEC said in a press release.
The commission said Goldman Sachs failed to disclose vital information about a synthetic collateralized debt obligation, including the role that a major hedge fund played in selecting the portfolio, despite the fact that the investor had taken a short position against the mortgage market.
Goldman Sachs tumbled 14% and to put things into perspective, this is the same as gold plummeting more than $150/oz. While gold can be volatile, we seldom see moves of this magnitude happen in a few minutes. And, I have no idea what Goldman Sachs fraudulent actions in mortgage investments have to do with the gold price. If anything, it should encourage investors to own gold.
One thing for sure, once you have gold in your hands, you are not holding anyone else's liabilities. I think this sell off is not based on anything other than short-term irrational behaviour that we have seen numerous times in recent months. Do you remember what happened to the gold price when news of Dubai defaulting hit the wires? However, in this particular instance the only logical explanation may lie in the belief that the hedge fund Paulson & Co. is being implicated and tied in on this fraud. If Paulson is implicated in the SEC charges, then traders are betting that there will be an exodus from his funds and that Paulson will have to sell just to deal with redemptions and client losses. It is well known that some of the Paulson holdings include some substantial positions in gold shares as well as gold. No matter what the outcome I doubt this will have any long-term effects on the price of the yellow metal and this drop in price is purely due to traders on Comex.
The never-ending drama of the Greece situation continues. In fact the story about whether Greece will need to get a bailout or not has changed so many times that I have lost track. It appears that the Eurozone aid package is against the spirit of the Maastricht Treaty which created the European Union and led to the creation of the Euro in the 90s. Economists claim that the treaty contains a clause preventing EU states from taking on the debt obligations of their neighbors. Nevertheless, forex traders seem to be speculating that Greece is preparing to request the emergency loan from EU and IMF next week when EU, IMF and ECB meet. In other words, it is likely that one way or another Greece will ultimately receive aid which should temporarily halt any further short-term declines in the euro. However, prudent investors in the eurozone might take advantage of this and add gold to their portfolios before another slide in the euro occurs. Interestingly, gold in euros, sterling and yen is trading at new highs or close to their recent highs. And, the rise in the gold price in these currencies has compensated investors for any losses they have suffered as a result of the devaluation of their currencies.
As sovereign debt continues to mount in most of the developed countries it is interesting to note that that the BRIC countries have accumulated huge reserves of foreign exchange. China has $2.447 trillion worth of forex reserves as of March, Russia has $420 billion, and India has $279 billion while Brazil has $242 billion. The question is, what are the BRICs going to do with all this money?
The Chinese have the most at stake. They can't dump their holdings in US Treasuries because selling would drive prices lower and hurt the rest of their existing portfolio. However, it is unlikely that will be eager to add to these positions. One thing we know is that they are interested to increase their holdings in gold. And, that they are also spending a lot of dollars on energy and mineral acquisitions outside of China — $32 billion last year — but this is a small number compared to the their total forex reserves.
According to a statement made on Wednesday, by Suresh Hundia, president of the Bombay Bullion Association (BBA) India's March gold imports jumped nearly six times from a year ago. Gold imports in March rose to 27.7 tons against 4.8 tons a year ago, Suresh Hundia, said on Wednesday. "Prices are down from the all-time highs we saw last year and that is why people are buying," Hundia told Reuters.
In 2009, the worst year in more than a decade for gold sales in India, gold imports were at 339.8 tons, down from 420 tons a year ago, data from the BBA showed.
Record high gold prices throughout last year coupled with worst monsoon in nearly four decades and worries over the pace of economic recovery following the global financial crisis reduced the appetite for the metal in 2009, the industry members said. However, as prices are slightly lower due to the firmer rupee, more buying interest is anticipated.
The sudden drop in the price of gold can be attributed to the news about Goldman Sachs. This has given the charts a false break to the upside just above $1160. The outcome of this can be either a move to the support level of $1100 in the short-term or a recovery back above $1160. Personally I see a rapid recovery and a re-test the $1160 level again.
About the author
David Levenstein is a leading expert on investing in precious metals .He brings over 30 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. Over the years, David has been published in dozens of publications and has appeared on SABC 3, CNBC and Summit TV (South Africa), and is a regular guest on JSE Direct, a premier radio business channel in Johannesburg, South Africa. He is also a regular commentator on www.kitco.com, www.mineweb.com, www.gold-eagle.com, and www.infomine.com David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
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Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.