Thursday, 19 August 2010

GOLD: Two-faced Goldman signals inflection point

Goldman caught 1
A few months ago, Goldman Sachs found itself in the headlines and subject to a major government investigation for the crime of, not to put it too politely, screwing its own clients.

It was found, during the dying days of the mortgage boom in 2007, to have encouraged a number of buyers of its mortgage-backed securities to invest in a bond which it knew another of its clients had constructed and designed specifically to crash and burn...

The so-called 'Synthetic CDO', a deadly financial weapon in the hands of anyone who didn't understand it (which plainly included most of those who bought the thing) imploded a few months later, vaporizing investors' capital and enriching both Goldman (who had started to bet against this type of bond in the markets) and their priviledged client who had designed it (hedge fund wizard John Paulson).

If you recall, a few months back Goldman's CEO and a number of his chastened employees were hauled up before Congress like schoolboys before the headmaster.  Their self-justifications were pitiful.  Some weeks ago the firm settled a law suit filed by the government with little fuss, paying a paltry fine and taking a slap on the wrist from the regulator, the S.E.C.

Old hands on Wall St know that this kind of two-faced behaviour has always gone on in the investment banking world.  But now the rest of us have learned one of Goldman's other dirty tricks.

Page 2

Zero Hedge, the well-sourced and widely-followed US finance blog, has revealed how Goldman puts out notes to the public and its non-priviledged clients with advice designed to encourage buying of a particular asset for the sole purpose of offloading its own holdings of that asset at a better price.

On 11th August it sent a note positing numerous reasons why gold was ready to make an imminent break higher.  No sooner had it done so than the unwashed masses, sniffing a free profit courtesy of the Goldman crystal ball, piled into the precious metal the very next day and sent it rocketing up from $1195 to now be within sight of its all-time highs at $1265.

Meanwhile, another note was being written for its special institutional and hedge fund clients, labelled 'not for distribution to the public'.  This made it quite clear that, after many years of being long gold, Goldman Sachs has now changed its position.  See the highlighted section on page 2 of the report, above.

Apparently, this is a strategy Goldman has employed for years.  As I write they are presumably offloading what must be a substantial holding of the yellow stuff into a ramping market.  The cat is out of the bag on this particular scam, so let's see what happens to the gold price.

Following on the heels of my earlier opinion piece and technical advice, plus the recent warning from Mark Hulbert of Hulbert Financial Digest whose own long-standing gold sentiment indicator is flashing caution, Goldman's decision to finally dump the stuff opens a narrow window to take profits at their own primped price.