Gold News

Gold Bounces as Goldman Sell-Off Blamed on "Risk Aversion", "Chinese Whispers" and Gold ETF Exposure

Gold Prices bounced 0.7% after falling to a two-week low for US investors early in London on Monday, rising from $1125 an ounce as commodities and world stock markets also extended Friday's losses.

Crude oil fell towards $81 per barrel, while the Euro tracked gold vs. the Dollar, and the Dollar itself hit a 4-week low vs. the Japanese Yen.

After Friday's news that investment bank Goldman Sachs is being sued by US regulators for fraud, "Precious metals were unable to avoid the liquidation," notes one London dealer today.

"As risk sentiment plunged, investors shifted from equities and commodities into US Treasuries," says HSBC in a note, and "Gold is clearly sensitive to changes in investor risk sentiment."

"Ultimately, we're looking at a pull back in risk," says a currency analyst. Gold Prices had just "hit high correlation [with stocks and commodities] and risk is off."

"In an interesting manifestation of the 'Chinese-whisper effect'," jokes long-time gold advocate Martin Hutchinson at Money Morning, "a frantic 'Sell Goldman' call obviously got transmuted into 'Sell Gold'."

Goldman Sachs' stock lost more than 12% on Friday, falling to a 7-week low.

However, the Paulson & Co. hedge fund – named but not charged in the SEC's accusations against Goldman Sachs – is also the single largest investor in the SPDR Gold Trust (GLD), controlling some 8.4% of the securitized Gold ETF fund according to end-2009 filings.

Worth some $3.5 billion at current prices, Paulson's Gold ETF position compares with the $1bn apparently made after helping to select and then betting against subprime mortgage-backed bonds sold by Goldman Sachs to other institutional investors.

Concerns over the "massive build-up of investment stocks" in Gold ETFs were most recently raised by the GFMS consultancy at its Gold Survey launch here in London last week.

Holdings at the SPDR Gold ETF ended Friday unchanged for the week, standing at a record 1141 tonnes of bullion.

"If fraud is proved" against Goldman Sachs, notes the Financial Times' Alpha blog, "then John Paulson's
hedge fund will be braced for compensatory claims."

But "Everyone in the market knew that portfolio agents [creating a package of different mortgage-backed bonds] would be lobbied both by long and short sides," notes John Gapper in the main FT paper today.

Bullish investors buying the resulting product effectively offered to pay the bears if the bonds defaulted, earning what was akin to an insurance premium in the meantime.

"The evidence that Goldman actively misled [German bank] IKB and [debt investor] ACA Capital about the transaction, as opposed to not disclosing everything, is patchy. There is no 'smoking gun' e-mail."

What's more, Goldman Sachs said Friday that it lost $90m on the deal itself – even after accounting for the $15m fee it received from Paulson & Co. for creating the disputed product – by investing in the collateralized debt obligations it sold to IKB.

The German bank, apparently "among the most sophisticated mortgage investors in the world" according to Goldman Sachs, received almost €10 billion in emergency government aid after nearly collapsing in late 2007.

"[Friday's drop was] a good thing from the point of view of continuing this rally" in global equities, reckons James Paulsen, chief investment strategist at Wells Capital Management, speaking to CNBC.

"I really think this market was stretched. You had a heck of a move in 45 days. It's a refreshing pause."

Ahead of Friday's 2.5% sell-off in Gold Prices, speculative players had raised their bullish betting on Comex Gold Futures and options for the third week running, latest figures from US regulator the CFTC show.

The "net long" position of bullish minus bearish bets held by hedge funds, private investors and other non-industry traders rose by almost one-third from the start of April to last Tuesday evening – the fastest fortnightly pace since Sept. 2009 – to hit a 3-month high equal to 909 tonnes of gold.

Precious metals dealing in Asia today "was disappointingly slow" says one Hong Kong broker, "despite the substantially lower prices" in gold, silver, platinum and palladium.

The Silver Price meantime hit a new April low of $17.48 an ounce, extending Friday's "collapse" below what technical analysts at bullion bank Scotia Mocatta call "massive technical support" at $17.66.

"While the Goldman Sachs saga has been the main factor" driving prices, says Leon
Westgate at Standard Bank today, "geology has also been an issue [because] gold
is often transported using commercial airlines.

"With flights in much of northern Europe still banned, due to the
volcanic eruption in Iceland, there are concerns over the availability
and movement of physical gold...impacting premiums in other parts of the
world."


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Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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