The Goldwatcher

 

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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