Monday, April 19, 2010

Goldman fraud case impacts Commodites, Gold

Last Friday's SEC fraud complaint issued against Goldman Sachs had a noticeable impact on the market: as would be expected, Goldman shares took hit after the news escaped mid-morning--a steep 13% hit by close. But the impact didn't settle with equities. Commodities--especially oil, copper, silver, and gold--took a good hit, as well: Gold lost 2%, copper lost 2.3%, oil lost 2.7%, and silver got hit the hardest by whopping -4.1%. Why did this happen, and is it related to the Goldman case?

Well, yes . . . sorta, but it seems everything is related to Goldman. One current and popular circulating explanation for the hit to commodities in general is that the SEC action stirred up that all-important "market uncertainty" which translates to "sell and move to dollars" for investors holding what might be considered risky positions on commodities. Of course, you know this also as "risk aversion." Traders quoted by the Wall Street Journal expressed the opinion that the moves in commodities were the results of investors simply "dumping" riskier assets and moving to the dollar. For short-term investors in gold, which had been performing well since the early February lows, and was up almost $100 off those lows by last Friday, the surprise of the SEC lawsuit might have served as, one trader put it, "an excuse to sell." The same could be said of silver and copper, and oil. Silver just about always exaggerates whatever happens in gold (up or down), so a double-impact on silver seems about normal compared to the move in gold. The fact that all this was matched with a move higher in Treasuries lends credence to the market-uncertainty-based-risk-aversion-quick-run-to-the-dollar hypothesis.

Additionally, there are at least two other factors worth mentioning in regards to the moves in commodities, and the first is Goldman Sachs' itself. Goldman is a
major commodities player: the firm is involved internationally and heavily in oil, natural gas, precious metals, industrial metals, agriculturals, livestock, and, of course, energy trading and carbon (google J Aron & Company, and check out my super-long post on the "$10 Trillion carbon market"). Seeking Alpha reported that the Goldman's 2010 commodities outlook placed oil up 20%, copper up 15%, gold at $1350/oz and silver at $20/oz. The futures on commodities markets are fantastically skittish, and when some bullish players saw a fellow bullish player get slapped with a fraud suit, they became risk-averse and sold. Unfortunately, this demonstrates how fundamentally out-of-whack our so-called "commodities" markets have become that prices swings are more often prompted by press releases than supply/demand fundamentals, but we have all know that for some time. Thus, Goldman itself, ironically, is a factor in the hit on commodities. But considering that the firm knew full well of the investigation and intent to sue long in advance (though it didn't bother to tell shareholders), I'm sure Goldman had their Friday commodities positions very, very well hedged.

Another factor worth mentioning applies less to commodities generally, as the Goldman factor does, and more to gold, oil, and copper specifically. This is the fact that these commodities are heavily held by one of names dropped in the SEC complaint, the $32-Billion hedge fund Paulson & Co. Please note, Paulson & Co has not been indicted by the SEC and they are not the subject of the SEC complaint, nor are they accused of wrongdoing, but someone somewhere (
Reuters) is speculating that if put under pressure by the SEC case, Paulson will have to sell some of its oil and gold interests. Exactly what "pressure" that might be, considering that the SEC has not charged Paulson with any offenses, has not been determined, evidently. Still, when investors think gold, they think Paulson, and so bad news on Paulson can impact the metal.

Paulson's gold position is large--very large. After making $20 billion off accurate bets against the housing bubble, including $1 Billion from the Goldman contracts indicated in the SEC complaint, the Paulson fund has since made moves that seemed to express robust confidence in the long-term prospects of gold. Paulson's position in gold or gold-related investments had increased notably by
May 2009, when gold represented 30% of the long side of the Paulson portfolio. By November 2009, Paulson moved approximately 10% of its portfolio to gold and gold-related investments--including a stake in the SPDR Gold ETF of 31.5 Million shares. This move paid off fairly quickly, as gold hit the all-time high in USD at $1226 on December 3. Paulson is recognized as a major player in gold, and with those 31.5 Million shares, the fund is the largest single shareholder in the SPDR Gold Shares ETF.

As of today, Monday April 19, commodities moved lower slightly, and Goldman shares have
recovered 1.6% after initially falling 3.6%. Many have speculated that this partial Goldman price recovery is due to leaked information that the SEC vote was a "party-line" 3-2 decision to proceed. The Bankster Report would like to state that "party-lines" in regard to the investigation and prosecution of fraud are totally unacceptable, and commends Chairwoman Shapiro for proceeding against Goldman Sachs in enforcing the law, even as two others on the SEC board objected.

And finally, one last interesting note: while today gold moved down slightly 0.14%, the metal actually hit yet another all-time high in both euro and UK pounds. Indeed, gold closed today at US $1136 ($91 off the December high), but across the pond it hit record levels at
€865 and £754 . Hmm...gold almost acting like a currency, isn't it?

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