Could Goldman Sachs hurt gold? The answer is most likely yes and here is how it would most likely play out.
The GLD ETF has been in a very nice up trend since the fall of 2008 but has been dead money for the past 6 months while other stocks have continued to run. After the big run in late 2009, GLD started consolidating and has been stuck in a trading range. It seems gold may need some sort of catalyst in order to break free of this range. A possible catalyst for gold is the Goldman Sachs debacle.
How will Goldman affect gold? John Paulson is the answer. Mr. Paulson is not being charged and is only mentioned in the Goldman Sachs CDO fraud suit brought on by the SEC but who knows exactly how deep this issue goes and what else they will find. The latest news we have heard is the SEC has found some incriminating emails and Goldman is set to testify before the senate on Wednesday the 28th. Bottom line is John Paulson has quite a big following on the street these days and anytime someone makes a record setting 15 billion dollars in the market in one year they will face unusual scrutiny. This may be enough to spook his investors and cause a flood of redemptions. One of Mr. Paulson’s largest holdings today is gold and if these redemptions start flowing out from his fund, Gold could get punished. Although this is mere speculation, investors tend to pull their money first and ask questions later.
We have seen this many times before but in particular LTCM comes to mind. Once the LTCM quant fund was learned to be in trouble and it was time for them to liquidate their positions the floor was pulled out from under them. Before LTCM could sell their positions, the rest of the street dumped everything they had even closely resembling the assets LTCM owned, leaving LTCM with rock bottom prices. In the end LTCM was stuck and the fed, Warren Buffet and every other big firm on Wall Street were forced to get together in an emergency meeting and bail them out. If they didn’t the fear was we could have a complete meltdown in our financial system. Now for every loser there is typically a big winner on the other end and in this case, the big winners were those big Wall Street firms who participated in the bailout. When it was all said and done they only had to pay LTCM pennies on the dollar for their assets. This may be extreme in this situation and we don’t think the same will occur but we do think we could see a ripple in the gold market. How the market reacts to this ripple will tell us where gold goes next but we think higher.
Now the GLD ETF is very liquid so can a similar thing happen to us here? We don’t believe that only Paulson liquidating his positions can technically damage gold but the lessons from the LTCM situation gives us insight into how the rest of the street plays a similar situation. If the rest of the street thinks that his investors might start pulling their money out of his fund they will front run his sell orders and hammer GLD and his other positions before he has a chance to liquidate. We don’t see something like a LTCM playing out, who was leveraged as much as 100 to 1 on less liquid positions but we could see a ripple effect and a short term breakdown in GLD. We think if a short term flush out like this happens, we don't see GLD breaking below the $104 or $100 levels and it could be followed by a break to the upside in GLD. This is why it is so important to have firm footing and solid entry points to ride out such a scenario.
It’s not for certain what gold does next, but one thing is for sure, our chart analysis will let us know the minute any big institutions start selling.
Here are some more of Paulson’s gold positions.
• SPDR Gold Shares (NYSE: GLD) owns 31.5M shares, down 2.2%
• Anglo Gold (NYSE: AU) owns 42.85M shares; down 4.5%
• Kinross gold (NYSE: KGC) owns 31.5M shares; down 3.5%
• Gold Fields (NYSE: GFI) owns 23.55M shares; down 4.8%
• NovaGold (NYSE: NG) owns 5M shares; down 4.3%.
For more information on Paulson’s see the street insider article http://bit.ly/bGPBxH
Disclosure: no positions