Investors Cautious on Gold, Assess Goldman Fallout

19 April 2010, 03:32 p.m. EST
By Debbie Carlson


Chicago (Kitco News) --Gold prices may be on a see-saw until investors sift through the fallout from the fraud charges filed by the U.S. Securities and Exchange Commission against investment bank Goldman Sachs, an action that slammed prices Friday and kept the markets nervous Monday.

Investors continued to troll for less risky assets Monday, fleeing equities and other commodities, including gold,  as they sought to avoid risk. Although sometimes gold is bought as a safe-haven in times of worry, the market has not acted like a low-risk vehicle lately because of all the investment money that has supported prices.

Just how much downside gold prices will have remains to be seen, as much depends on whether other banks are  charged, or whether there are other repercussions. Even so, many market watchers see strong support for gold under current levels.

Goldman was charged with fraud for its role in creating mortgage related securities that legendary hedge fund manager John Paulson wanted to bet against. Paulson’s firm is not charged by the SEC with any wrong-doing.

“I think people are concerned if there will be more fallout to come. Is Citi next? Deutsche Bank? Right now that’s the bigger issue,” said Dave Meger, director of metals trading at Vision Financial Markets.

Not only are some investors watching what happens to Goldman or other banks, many are concerned about what impact this news has on Paulson & Co., which launched a gold fund this year and has billions of dollars invested in gold exchange-traded funds.

Meger said if investors in his fund decide to redeem their investments, particularly on a large scale, it could have reverberations in gold.

“As a fund, his hasn’t performed particularly well in the first quarter,” said Spencer Patton, president of hedge fund Steel Vine Investments. Yet he doesn’t think Paulson’s attachment to the Goldman news is a “black swan” event. “At the end of the day, it’s not a material factor to influence gold prices, except if things got much worse for him.”

The Goldman news comes on the heels of a movement in the U.S. Congress to escalate financial reforms across the board. Among the reforms potentially affecting gold are possible position limits for metals trading. The  Commodity Futures Trading Commission,  the government oversight agency for futures, is debating such limits. Events such as the CFTC proposal  give pause to people who buy gold as an investment tool, rather than buying gold for a strictly fundamental reason, market watchers said.
Both Meger and Patton said the price break should be put into context, as gold prices – and commodity and equity prices, too – had rallied vigorously, so the correction is healthy.

“The market was ripe for long liquidation and the impetus was the Goldman news,” Meger said.  He added that while the Goldman news was the talk of the town Friday and Monday, in gold’s overall picture, it’s relatively a small event.

Ralph Preston, analyst at Heritage West Futures, said with the break in prices, gold is at a “support and resistance pivot point” around $1,136 an ounce, based on the June Comex futures. Where prices go from there could easily influence market direction in the short-term, he said. One event that could tip the balance will be Goldman’s earnings details Tuesday. “We really have to be patient. There’s no really big economic news out there to influence trade, so this (the Goldman suit) is going to be the primary story,” Preston said.

Preston believes if the market breaks the pivot point, June Comex prices can fall another $20. “Unless we can close over $1,155, the disposition of the market is to test the downside,” he said.

Meger said in the bigger picture, gold is entering its summer doldrums period which could mean quiet range-bound trade. He also pointed out reduced demand from India and China could limit bulls’ hopes for a rebound in the near-term. “I think we’re in a sideways, consolidative phase right now. It doesn’t take away my bullish bias (for higher prices later this year),” he said.

The 2010 low for gold is just below $1,050 and Patton said gold has been very stable so far. He sees $1,000 as “incredibly strong support” for prices with gold values rallying into 2011.

By Debbie Carlson, contributing to Kitco News;