The Goldwatcher

 

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Gold’s stateless money franchise: 

The key message after yesterday’s Senate enquiry on Goldman Sachs is that global regulatory standards are necessary  to prevent another  financial collapse. The spotlight should be on:

 1: Partisan politics in the US  frustrating legislative progress 

 2: Contagion risks flowing from Greece, Portugal and other vulnerable Sh**ty curencies; and

3: Stalled global agreements on financial market regulation.

These developments will all take time. Gold’s stateless money franchise affords instant protection against  the risks associated with currency contagion  and vulnerable securities.

 The  Sh**ty securities questions:

After the long Senate hearing yesterday do we or don’t we think Goldman put lipstick on the pig? Their lengthy  rebuttal  made the three key points that follow in italics below. My take on what we learned yesterday follows after each point:

1:’Goldman Sachs never created mortgage-related products that were designed to fail.’

At this stage I am not convinced.  Questioned on oath yesterday Goldman Executive Tourre couldn’t even stick to the written response prepared by his lawyers and that’s not persuasive. We need to know what John Paulson and others connected with security selection and rating agencies have to say. 

 2  ‘It is critical to remember that the decline in the value of mortgage-related securities occured as a result of the broader collapse of the housing market.’

This can only be partly true.  The securities would have crashed anyway becuase  they were, as described by Goldman Executives,   Sh**ty.

3:  ..(the decline in the value of mortgage-related securities) was not because there were any deficiencies in the underlying instruments. The instruments performed as would have been expected in those unexpected circumstances.’

There were no unexpected circumstances from the time when,  to save their butts, Goldman Executives changed strategy from supporting long positions with mortgage related securities to agressively shorting  similar securities. Goldman expected, hoped and prayed for the declines.

Another key question to consider is whether any organisation, with even a tiny percentage of the brilliant minds working in Goldman, would not have been very anxious about AAA and other high credit ratings for mortgage securities that  should have been scored S** or below.

Goldman’s day in the Senate: 

Goldman’s worst day with this issue may have been yesterday. They may yet escape any compensation and, even if settling could cost them  $1 billion or so,  Goldman MD Blankfine indicated yesterday big sums are managable everyday issues for them.

For most of us that isn’t the case. We need to protect our assets against contagion. Gold’s stateless money franchise ensures potection. 

Opinions and advice:

Readers, particluarly those who have not yet read The Goldwatcher,  are reminded that this blog is not an advisory service. Opinions expressed are not intended as investment advice and should not be treated or used as investment advice

 

CLICK HERE FOR KITCO GOLD PRICES AND ANALYSIS

CLICK HERE FOR REALTIME MULTICURRENCY GOLD PRICES  

 TO BUY THE GOLDWATCHER CLICK HERE:

No Goldman lipstick on the pig?

On 23rd April Goldman Sachs posted a lengthy  rebuttal  to all charges of impropriety alleged by the SEC and others. The last sub paragraph in their  Executive Summary is relevant in relation to the SEC fraud charge with three key points made: 

1:’Goldman Sachs never created mortgage-related products that were designed to fail.’

2  ‘It is critical to remember that the decline in the value of mortgage-related securities occured as a result of the broader collapse of the housing market.’ and

3:  It (the decline in the value of mortgage-related securities) was not because there were any deficiencies in the underlying instruments. The instruments performed as would have been expected in those unexpected circumstances.’

No pig? The housing market collapsed:

Readers of the Goldwatcher will have read on page 147:

1: ‘You had to be blind not to see the bubble in the US Housing market;’ and

2:’Banks were heavily implicated in the development of the housing market bubble and the crash.’  

Can  banks now seriously claim they were  unaware that their Triple A Rated mortgage backed securities were suspect? Were they blind?   Or innocent bystanders?  Or just naive victims of a wholly unexpected housing market collapse that came out of the blue? Banks were anything but naive and can’t make any of these claims. The securities they created on the back of a bubble they helped inflate were pigs. The only question is who put the lipstick on them.

No Lipstick? The securities performed as expected :

Addressing the key contentious issue in the SEC fraud charge Goldman claim they ’never created mortgage-related products that were designed to fail.’  However there is a more general issue. The relationship between banks and the credit rating agencies they paid to rate their mortgage backed securities. Agencies  who share responsibility for the lipstick on the pig.

Commenting on the absurd Triple A Ratings banks secured for dodgy securities Senator Carl Levin has been scathing. He likens the bank - rating agency relationship to one of the litigants in a case paying the Judge. Or one sporting team paying the referee. The relationship may not have been that corrupt. But neither were banks naive. They can’t protest the housing bust came out of the blue, took them by surprise and their securities performed ‘as expected’ in ‘unexpected circumstances.’ 

A can of worms is open. Integridy of key financial institutions and key underpinnings of our credit based economies are suspect. There are no silver bullets to magic the mess away.

Gold Stateless  Money Franchise:

In a recent comment Weakness Begets Weakness the gold fund and money manager Eric Sprott references ‘the subprime mortgages rated AAA now worth pennies on the dollar.’  He tracks  both the Greek Soveriegn and Mortgage Backed Securities debacles and argues:  ’…as they relate to sovereign debt, the ratings provided by the agencies are highly suspect…there appears to be very little forward-looking information actually factored into their credit models. In some cases, the agency ratings end up looking absurdly optimistic.’

Sprott finds the Triple A rating accorded to the US Government out of touch with reality and, after citing recent analysis by the US Government Accounting Office (GAO) he  concludes ‘The ratings agencies can opine all they want, but it seems clear to us that the only true AAA asset to protect your wealth is gold.’ 

On Pages 116 and 117 The Goldwatcher addreses the bottom line as seen by the GAO : ‘Federal Fiscal Policy is unsustainable.’ That was written over two years ago. It was true and menacing then an is even more menacing now.  And it’s why people are seeking the protection afforded by gold’s stateless money franchise now.

Sprott makes a strong case for gold as the enduring Triple A Security that will survive sovereign ratings downgrades.  

# Note added 27th January: 

Yesterday Senator Carl Levin published a confrontational listing of the issues and findings of fact  on which Goldman Executives will be challenged today.  Depending on the legal advice witnesses have they may not all testify.  Levin’s summary reads:

The bipartisan Subcommittee investigation has resulted in the following findings of fact regarding the role of investment banks in the financial crisis:

1. Securitizing High Risk Mortgages.  From 2004 to 2007, in exchange for lucrative fees, Goldman Sachs helped lenders like Long Beach, Fremont, and New Century, securitize high risk, poor quality loans, obtain favorable credit ratings for the resulting residential mortgage backed securities (RMBS), and sell the RMBS securities to investors, pushing billions of dollars of risky mortgages into the financial system.
2. Magnifying Risk.  Goldman Sachs magnified the impact of toxic mortgages on financial markets by re-securitizing RMBS securities in collateralized debt obligations (CDOs), referencing them in synthetic CDOs, selling the CDO securities to investors, and using credit default swaps and index trading to profit from the failure of the same RMBS and CDO securities it sold.
3. Shorting the Mortgage Market.  As high risk mortgage delinquencies increased, and RMBS and CDO securities began to lose value, Goldman Sachs took a net short position on the mortgage market, remaining net short throughout 2007, and cashed in very large short positions, generating billions of dollars in gain.
4. Conflict Between Client and Proprietary Trading.  In 2007, Goldman Sachs went beyond its role as market maker for clients seeking to buy or sell mortgage related securities, traded billions of dollars in mortgage related assets for the benefit of the firm without disclosing its proprietary positions to clients, and instructed its sales force to sell mortgage related assets, including high risk RMBS and CDO securities that Goldman Sachs wanted to get off its books, creating a conflict between the firm’s proprietary interests and the interests of its clients.
5. Abacus Transaction.  Goldman Sachs structured, underwrote, and sold a synthetic CDO called Abacus 2007-AC1, did not disclose to the Moody’s analyst overseeing the rating of the CDO that a hedge fund client taking a short position in the CDO had helped to select the referenced assets, and also did not disclose that fact to other investors. 
6. Using Naked Credit Default Swaps.  Goldman Sachs used credit default swaps (CDS) on assets it did not own to bet against the mortgage market through single name and index CDS transactions, generating substantial revenues in the process.

Witnesses at Tuesday’s hearing will include Goldman Sachs Chief Executive Officer Lloyd Blankfein, Chief Financial Officer David Vinier and executives who were involved in the assembly, marketing, sale, and trading of mortgage-related securities.

Opinions and advice:

Readers, particluarly those who have not yet read The Goldwatcher,  are reminded that this blog is not an advisory service. Opinions expressed are not intended as investment advice and should not be treated or used as investment advice

 

CLICK HERE FOR KITCO GOLD PRICES AND ANALYSIS

CLICK HERE FOR REALTIME MULTICURRENCY GOLD PRICES  

 

An open can of worms: 

Readers of The Goldwatcher will not be surprised by recent news affecting Goldman Sachs. Their questionable practice of short selling securities of the same class as they sold to clients and others was highlighted on page 138 and identified as a reason to own gold as insurance against financial market risks. The book went to press two years ago.

When the  US Securities and Exchange Commission (SEC) announced a civil fraud charge against Goldman Sachs on Friday the price of their shares fell about 13%  - wiping over $11 billion  off the company’s market capital. Though Goldman dispute the charge it is an enormous embarrasment to them, to the investment banking establishment, the financial services industry and the national regulators who have been either asleep at the wheel or missing in action. The SEC case is complex and the story has still to run its course. It’s early days in relation to  consequences.

In a nutshell the SEC’s complaint alleges that Goldman stiched their customers up by selling them a synthetic security based on a vulnerable portfolio of securities selected by a hedge fund manager who intended to profit from shorting the same securities via Goldman. The investors ended up losing about $1 billion. The hedge fund manager ended up making about $1 billion.  The SEC fraud complaint arises from the alleged non disclosure by Goldman to their client  buyers  relevant information on the hedge fund’s role in selecting securities likely to fall and the short position bet made by the hedge fund.

It’s a can of worms if ever there was one.  The kind of treachery that, if ever proven or even widely suspected, will undermine  Goldman’s franchise as international bankers. It’s easy to see why their share price took a hit. But why did gold also fall?

Gold prices and Goldman’s relationship with John Paulson:

We would expect that when Wall Street gets caught out putting lipstick on a pig,  as they often do, the gold price will go up. But in this instance gold went down and it’s still falling. To an extent this is because the hedge fund manager involved in the deal with Goldman was the high profile billionaire gold bull and gold fund manager John Paulson.

The SEC have made it clear they are not alleging any fraud by Paulson. But investors who lost money on the securities may launch their own claims and, for various reasons,  Paulson may reduce his vast holdings of gold via Exchange Traded Funds and trigger a fall in gold prices. There is  no evidence that this will be the case. But nervous investors or specualtors may expect he will and reduce their exposure in anticipation.

Neither The Goldwatcher book or this blog are aimed at fine tuning gold price prospects. The case for owning gold as insurance against financial market risks was compelling when the book was published two years ago.  It still is. 

# The words ‘ a synthetic security based on’ in line 2 of Para 3 have been added for clarity after publication.

Opinions and advice:

Readers, particluarly those who have not yet read The Goldwatcher,  are reminded that this blog is not an advisory service. Opinions expressed are not intended as investment advice and should not be treated or used as investment advice

CLICK HERE FOR KITCO GOLD PRICES AND ANALYSIS

CLICK HERE FOR REALTIME MULTICURRENCY GOLD PRICES  

 

Eric Sprott and the IMF:

Well known for the fierce case he makes against reckless central bank money printing Eric Sprott is one of the world’s most successful gold fund managers and investors.

When Sprott offered to buy gold directly from the IMF recently he encountered a rebuff. Commentators touted the rebuff as proof of something sinister in the declared gold holdings of the IMF or its members. A direct enquiry to the IMF yesterday made by an unemotional journalist has cleared the air.  Here is his report:  

‘We spoke with Alistair Thomson of the IMF and he clearly explained his reasonings behind not being able to sell Mr. Sprott gold.  Among them:

• The IFM only goes through a specific broker.
• It only sells gold to sovereigns.
• Thus, Sprott’s desire to purchase IMF gold did not comply with ‘protocol’. 

The sting appears be out of charges suggesting the IMF was engaged in a cover up.  But Sprott’s warnings on the money printing outcomes are alarming.  Two of his recent articles  ‘Is It All a Ponzi Scheme’ and ‘Dead Government Walking’ pull  no punches. Many readers will find the conclusions unthinkable.

Unintended revelations at a CFTC Hearing:

Commentators in the gold community suggested market manipulation again at a March 25th meeting of the US Commodities and Futures Trading Comission concerning precious metals. Surprisingly the most telling revelation at the meeting  came from an ambiguous comment by Jeffrey Christian, one of the world’s foremost authorities on markets for precious metals.

In a nutshell, in response to a question on multiple gold trades based on London Bullion Market Association (LBMA) physical stocks,  he declared: ‘People say, and you heard it today, there is not that much physical metal out there, and there isn’t. But in the “physical market,” as the market uses that term, there is much more metal than that. There is a hundred times what there is.’ This is a link to a video of the testimony and this article gives a useful account of the CFTC meeting, Jeffrey Christian’s revelation and its implications. 

You should be on your guard if you own gold via an Exchange Traded Fund or other custodial or paper structure.  Imagine the consequences if anything goes wrong when you have been holding gold as a physical store of value to protect against risks associated with paper assets and you find you have an asset that’s 99% paper and 1% real.  Like the worthless  fraudulent securitized debt securities that tipped the world economy into the mire a few years ago -  but with your Government now broke and unable to bale you out!  

Is gold poised to spike?

 

Chart courtesy Kitco www.kitco.com 

While The Goldwatcher book was never intended as a source for gold price prediction, assessing a reasonable price for gold,  based on supply and demand fundamentals,  is key to the analytical framework outlined in Chapters 1 to 9, this blog and the following recent postings: 

September 8th 2009: $1000 Gold - Here to stay or here to play? 

November 5th 2009 : Are Goldrush Prices Making Sense?

December 18th 2009 : Gold : Motivation & Strategy (Investors Chronicle Article)

January 4th 2010:  Gold: Afghanistan and Obama’s multi trillion $ ‘naughties’ legacy

January 12th 2010 : Gold Prices, a Weak $ and a Strong China

The above chart reflects the gold price settling down over the months since the ‘Are Goldrush Prices Making Sense’ blog was posted.  Technical analysts are now pointing to signs of a breakout  - well supported by increased gold holdings in Exchange Traded Funds and with central bank support.

There may be an innocent explanation for Mr. Christian’s remark: ’But in the “physical market,” as the market uses that term….there is a hundred times what there is.’ But I have not seen him, the LBMA, the World Gold Council or any responsible custodian in the gold industry come forward with the explanation. 

A gold price spike won’t come as a surprise to me unless I have seen a satisfactory explanation on what he meant. And, if and when an explanation comes, keep these two points in mind. First  the case for holding gold as insurance against the unthinkable is compelling. Second Eric Sprott’s track record as a forecaster is formidable. It would be dumb to dismiss his warnings as a sprott of bother. 

Opinions and advice:

Readers, particluarly those who have not yet read The Goldwatcher,  are reminded that this blog is not an advisory service. Opinions expressed are not intended as investment advice and should not be treated or used as investment advice