Goldman Sachs Got Us on Gold; Why They Won’t Get Us on Stocks

This is a story of how the big banks pulled gold prices from under our feet, but why their plan for the stock market won’t pan out … When gold bullion prices went into semi-crash mode in late spring of this year, some stories written by financial analysts suggest big banks colluding together to bring gold bullion prices crashing down. If you remember, The Goldman Sachs Group, Inc. (NYSE/GS) came out with a report saying gold bullion prices would go down…and magically, they did!

At about the same time Goldman Sachs gave a “sell” recommendation on gold bullion, JPMorgan Chase & Co. (NYSE/JPM) was selling gold bullion on the paper market. The plunge in gold bullion prices started in April—but JPMorgan was selling gold since the beginning of the year. From January to April, the big bank’s house account had a net short position of 14,749 100-ounce COMEX gold contracts—or about 1.47 million ounces of gold bullion. (Source: “Year to Date Delivery Notices,” CME Clearing, August 19, 2013.)

I’ll be the first to admit it: the gold bullion price takedown that started in April sure looks and smells fishy.

 

Once the sell-off in gold bullion began, no one cared about demand or supply (the reason why gold bullion prices increase or decline). The fundamentals were thrown out the window. Irrationality and emotions took over, and investors ran for the exit. Gold bullion prices have started to climb back up. They are above $1,300 an ounce and marching towards the next big level at $1,400. The gold “play” is over for the big banks; they’re onto something else—the stock market. The wave of optimism towards the stock market continues to gain momentum. Big banks are telling us the stock market is going to go higher.

Some calling for higher stock prices say earnings are good, some say valuations are good, some say the economy is improving, and others say investors will move out of the bond market and into the stock market. Goldman Sachs says the S&P 500 will increase eight percent in the next 12 months. Its target for the S&P 500 is 1,825. Its reason: economic growth will pick up its pace. (Source: Bloomberg, August 13, 2013.) When I look at Goldman Sachs’ latest prediction, I have two questions: Will it and other big banks be right on the stock market like they were on gold? And will the key stock indices continue to increase in their desired direction?

This time, dear reader, big banks won’t be right. They could be long stocks and they could be saying stock prices will rise so their bets on the market get even more profitable; but this time around, they’re simply too optimistic. If the theorists are right and big banks did drive gold bullion prices lower, we must remember that big banks were only able to drive the gold bullion market lower for a very short period of time, as the metal’s price is now bouncing back. The stock market will also snap back to reality, as optimism faces the facts.

What am I talking about? Take a look at the chart below of margin debt (the amount of money people borrow to buy stocks).

 


 

Lombardi Margin DebtThe margin debt on the New York Stock Exchange (NYSE) is at a record high—it stood at $376.6 billion in June, higher than what it was before the “Tech Boom” bust in 2000, and just about the same level it was at in 2007, just before stock prices started to come down. (Source: New York Stock Exchange web site, last accessed August 20, 2013.)

 


 

The higher the margin debt goes, the bigger the sell-off in stocks will be, because with so much leverage, one negative move in the stock market will result in a domino effect, as investors make good on their margin calls.

Earnings for public companies are dismal. So far, 72% of the companies on the S&P 500 were able to beat their already lowered earnings expectations for the second quarter. Great? Don’t be so quick to judge. Only little more than half of them—53%—were able to beat revenue estimates (source: Fact Set, August 16, 2013), and companies have been engineering earnings growth through a record amount of stock buyback programs. But earnings at the big banks — they were stronger than ever!

Of the S&P 500 companies that have already provided guidance for their third-quarter corporate earnings, 75 offered a negative outlook, while only 17 have given a positive outlook. (Source: Ibid.)

As for the economy, I don’t think I have to go into detail here again. My family of Profit Confidential readers knows the real scoop on the economy: it’s anemic at best.

While the majority of jobs created in the U.S. since the credit crisis have been in the low-paying retail and service sectors, millions of Americans still live in homes with negative equity. And with mortgage rates rising, the housing market is in trouble again. Look at Wells Fargo & Company (NYSE/WFC), one of the big banks. It announced yesterday it was laying off 2,000 people from its mortgage unit because higher interest rates are cutting demand! (Source: Bloomberg, August 21, 2013.)

If I have to bet, I would go against Goldman Sacks in its call that the stock market will be eight percent higher in the next 12 months. I’d take the opposite position. I like ProShares Short S&P500 (NYSEArca/SH), an exchange-traded fund that shorts the S&P 500; I also like SPDR Gold Shares (NYSEArca/GLD), a play on rising gold bullion prices ahead. I, for one, am betting against the big banks—all “shows” can only go on for so long.

 


 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • America Goes Full Imbecile
      Credit has a wicked way of magnifying a person’s defects.  Even the most cautious man, with unlimited credit, can make mistakes that in retrospect seem absurd.  But an average man, with unlimited credit, is preeminently disposed to going full imbecile.   Let us not forget about this important skill...  [PT]   Several weeks ago we came across a woeful tale of Mike Meru.  Somehow, this special fellow, while of apparent sound mine and worthy intent, racked up...
  • Retail Capitulation – Precious Metals Supply and Demand
      Small Crowds, Shrinking Premiums The prices of gold and silver rose five bucks and 37 cents respectively last week. Is this the blast off to da moon for the silver rocket of halcyon days, in other words 2010-2011?   Various gold bars. Coin and bar premiums have been shrinking steadily (as have coin sales of the US Mint by the way), a sign that retail investors have lost interest in gold. There are even more signs of this actually, and this loss of interest stands in stark...
  • Credit Spreads: Polly is Twitching Again - in Europe
      Junk Bond Spread Breakout The famous dead parrot is coming back to life... in an unexpected place. With its QE operations, which included inter alia corporate bonds, the ECB has managed to suppress credit spreads in Europe to truly ludicrous levels. From there, the effect propagated through arbitrage to other developed markets. And yes, this does “support the economy” - mainly by triggering an avalanche of capital malinvestment and creating the associated boom conditions, while...
  • Gold Divergences Emerge
      Bad Hair Day Produces Positive Divergences On Friday the ongoing trade dispute between the US and China was apparently escalated by a notch to the next level, at least verbally. The Trump administration announced a list of tariffs that are supposed to come into force in three week's time and China clicked back by announcing retaliatory action. In effect, the US government said: take that China, we will now really hurt our own consumers!  - and China's mandarins replied: just you wait, we...
  • Industrial Commodities vs. Gold - Precious Metals Supply and Demand
      Oil is Different Last week, we showed a graph of rising open interest in crude oil futures. From this, we inferred — incorrectly as it turns out — that the basis must be rising. Why else, we asked, would market makers carry more and more oil?   Crude oil acts differently from gold – and so do all other industrial commodities. What makes them different is that the supply of industrial commodities held in storage as a rule suffices to satisfy industrial demand only for a...
  • Chasing the Wind
      Futility with Purpose Plebeians generally ignore the tact of their economic central planners.  They care more that their meatloaf is hot and their suds are cold, than about any plans being hatched in the capital city.  Nonetheless, the central planners know an angry mob, with torches and pitchforks, are only a few empty bellies away.  Hence, they must always stay on point.   Watch for those pitchfork bearers – they can get real nasty and then heads often roll quite literally....
  • Lift-Off Not (Yet) - Precious Metals Supply and Demand
      Wrong-Way Event Last week we said something that turned out to be prescient:   This is not an environment for a Lift Off Event.   An unfortunate technical mishap interrupted the latest moon-flight of the gold rocket. Fear not true believers, a few positive tracks were left behind. [PT]   The price of gold didn’t move much Mon-Thu last week, though the price of silver did seem to be blasting off. Then on Friday, it reversed hard. We will provide a forensic...
  • Merger Mania and the Kings of Debt
      Another Early Warning Siren Goes Off Our friend Jonathan Tepper of research house Variant Perception (check out their blog to see some of their excellent work) recently pointed out to us that the volume of mergers and acquisitions has increased rather noticeably lately. Some color on this was provided in an article published by Reuters in late May, “Global M&A hits record $2 trillion in the year to date”, which inter alia contained the following chart illustrating the...
  • Cryptocurrency Technicals – Navigating the Bear Market
      A Purely Technical Market Long time readers may recall that we regard Bitcoin and other liquid big cap cryptocurrencies as secondary media of exchange from a monetary theory perspective for the time being. The wave of speculative demand that has propelled them to astonishing heights was triggered by market participants realizing that they have the potential to become money. The process of achieving more widespread adoption of these currencies as a means of payment and establishing...
  • The Fed's “Inflation Target” is Impoverishing American Workers
      Redefined Terms and Absurd Targets At one time, the Federal Reserve's sole mandate was to maintain stable prices and to “fight inflation.”  To the Fed, the financial press, and most everyone else “inflation” means rising prices instead of its original and true definition as an increase in the money supply.  Rising prices are a consequence – a very painful consequence – of money printing.   Fed Chair Jerome Powell apparently does not see the pernicious effects...
  • A Walk on the Wild Side
      A Walk on the Wild Side   “Never play cards with a man called Doc.  Never eat at a place called Mom’s.  Never sleep with a woman whose troubles are worse than your own.” – Nelson Algren, A Walk on the Wild Side   Fresh Fruit or Rotting Vegetables? A subtle gas seems to always be vented into the atmosphere at the sunset of an extended bull market.  As the light fades, an odor that’s indiscernible from that of fresh fruit or rotting vegetables wafts down...

Support Acting Man

Item Guides

j9TJzzN

The Review Insider

Dog Blow

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com