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Unthinking Action in the Gold Price

Will gold be bolstered by the Greek bail-out and the Goldman Sachs fraud case...?

the Gold Price fell on news of the SEC's civil fraud charge against Goldman Sachs, notes Julian Phillips at

The Gold Price fell on the belief that both Goldman Sachs and John Paulson's hedge fund – the largest single investor in the SPDR Gold ETF trust fund – would have to sell their gold holdings. That reaction was founded on uncontrolled emotions, you would rightly suppose. It was very like gold falling after Greece went to the European Union and IMF for a bail-out.

The Euro fell as the Greek crisis hit. The additional reaction in Gold Prices was based on the supposition that gold is tied to the Euro. Not a great deal of thought went into these reactions, but if you can make money by inciting investors like this, why not?

These reactions illustrate that emotion, alongside the technical picture, drive short-term prices exclusively. Longer-term investors, however, apply more thought to their investments than this. And it is their view that needs to be looked at in depth if we are to understand just how the Greek or Goldman Sachs stories could influence future gold and Silver Prices.

Starting with Goldman Sachs, the bank says that it had concluded in an earlier internal investigation that the young salesman involved – and now indicted – Fabrice Tourre had done "nothing wrong". The bank feels that, by extension, it has done nothing wrong either.

This speaks of a failure to share the same morality as every other observer, so what should be done? Is Goldman Sachs shameless? How many executives face a 'morality' test that applicants are required to pass? The subject doesn't even come up. Usually the assumption is that all of us have the same basic morality. The government and existing laws are the arbiter of such behavior, so if the law is not sufficient, the consensus view is to pass another one that is – and that's where we are now.

In practice, the most important aspect of such morality is that it should allow the money systems to work and inspire confidence in them. Compare this to what's been happening and do you see trust or confidence improving either inside the US or the rest of the world? In this case, the horrified reaction of the worldwide public is in the process of undermining both confidence in and the workability of the banking system, already undermined by the "credit-crunch" and the government bailouts. The winners, at all points, have been the bankers, with burgeoning profits, fewer competitors and the inside track on the world's business dealings.

Right now the US is facing a clash of principles in capitalism and the free markets. The democratic structure of the US has a system where, from individuals up to institutions, each is independent, while being inter-dependent. The US lauds this system as the best in the world. In Europe with its more socialist system, government control is more exacting. In China there is no such independence and all will do as the governments says.

The performance of the Gold Price over the last decade tells us that the workability of money systems has been found wanting. Stand back and see that this is not about Goldman Sachs but the entire system. The US system is in trouble and by extension the systems of the rest of the developed world. Internationally, there is no regulatory body to govern it. Jurisdiction gets in the way. Right now, to all intents and purposes the US money system rules the world.

While politicians across the world are trying to control or increase regulations on banking activities, we ask, "do governments have sufficient power to control money systems?" Does the US government have the power to do so? With the current belief that the banks are behaving exclusively in their own interests, at the expense of others, in the name of profits an acid test is upon us! Why do we believe the issue is this big?

The days when a bank was just a part of community business has gone. Today, banks have grown to be the veins and arteries of all aspects of US and the world's financial life. Everybody uses the banks for every financial transaction. Not only have they become "to big to fail" but dominating. To what extent?

In 1995, the assets of the six largest banks totaled 17% of the nation's GDP. Now they have assets amounting to 63% of GDP. The share of all banking industry assets held by the top 10 banks rose to 58% last year, from 44% in 2000 and 24% in 1990. So in a face-off with government, who holds the power? If government (through its SEC agency) loses the Goldman Sachs case, just what will happen to trust and confidence in the world's money systems?

You may say that all the US banks account for that number not just these main banks. But Goldman Sachs is the biggest US investment bank and among the top six US banks overall. The credit crunch reduced the competition as the size and importance of the six largest banks (Bank of America, Citigroup, J.P.Morgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley) increased throughout it. Merrill Lynch is now part of Bank of America, Bear Stearns part of J.P.Morgan Chase and Wachovia part of Wells Fargo. Of more importance, Goldman and Morgan converted to bank holding companies to gain access to lending from the Fed's discount window. The backing that the US taxpayer gave to these banks required no onerous terms of repayment but was designed as a loan all of us would want, 'pay back when able'.

Can you get a loan like that from your bank?

Banks are the backbone of the global economy, of course. So the revelation of the fraud charge against Goldman Sachs is all the more critical. It is a structural fault in the system!

Please note that we are looking at the impact of these issues on the long-term Gold Price, which essentially defines how sick trust and confidence in the system really are. It is not our role to moralize but to forecast from what is happening now. But what are the objectives of financial reform? When the credit crunch hit, the Federal Reserve acted to save the financial system with saving the banks as the focal point. And now are these objectives targeting trading excesses? Is reform to ensure that banks do lend more and support the economy, or is the main aim to maximize profits still?

Looking back at the efforts to date to repair the financial system, have regulators succeeded? We're still waiting on that! The US needs a reformed, consumer supportive, banking system if the US or any other developed world economy is to get back to pre-crisis levels. It hasn't happened yet and, so far, there's nothing there that will restore confidence and trust.

Let's see if the government is able to regulate the $450 trillion derivatives market. Effective reformation, especially if a concentrated short position held by the banks against gold and silver is closed, could see the Gold Price soar. New laws may allow the big banks to squeeze past such proposed regulations, however. The debate begins this week.

President Obama has said, "We have gotten into one of those places where we need to update those rules of the road and if we do so, not only is that good for the economy, not only does it protect consumers and investors, it's also good for the financial sector, because it will rebuild trust." Finance ministers from the Group of 20 nations have just met in Washington to consider global reforms, including a proposal by the International Monetary Fund for two new taxes on banks to fund future bailouts. Again, any merely superficial action would tend to drive up Gold Prices long-term.

How will Goldman Sachs fare against the SEC? This question has a direct bearing on the future Gold Price, long-term. If the bank doesn't fight or settles out of court, it will have lost, because of the residual uncertainty as to whose interests they favor, theirs and selected clients or do they really have integrity? We believe it has made a serious mistake as far as trust and confidence in the banking system goes. After all, it is not a matter of showing it kept the rules (which were clearly inadequate) but proving their integrity. Right now it seems that no matter what happens, it will take them many years to be trusted and inspire confidence again.

The banking system overall will be tarred with the same brush and if the damage in the CDS and CDO derivative market extends to mishandling sovereign states such as Greece, then the global banking system becomes almost cancerous. The global monetary system will continue as is, it won't collapse, because it's the only system out there, but the prudent investor will add 'investments' outside the banking system to his portfolios.

With a fraud charge against the biggest and the best US investment bank...with anger against banks red-hot after their tax-payer rescue...and with bailed-out bankers making huge profits, but not doing too much to help the taxpayer in return...banks could not have done that much more to invigorate the Gold Price. It will take the full course of the court case to press that point home but the journey can't be stopped now. So yes, the Goldman Sachs case will bolster the Gold Price, we believe.

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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