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).
The 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.
Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- End of an Era: The Rise and Fall of the Petrodollar System
The Transition “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
- Writing on the Wall
Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so. It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
- A Fully Automated Stock Market Blow-Off?
Anecdotal Skepticism vs. Actual Data About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals. The bots keep buying... Illustration via...
- The Central Planning Virus Mutates
Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination. A...
- Destination Mars
Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks. If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical. But, in certain economies, this is now standard operating procedure. The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
- America Has Become a “Parasitocracy”
Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to. Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
- Fat People for Trump!
Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot. The protest vote attractor with the funny hair. Image credit: Liberty Maniacs Trigger warning: In the following ramble, we make fun of...
- Long Term Market Perspectives
Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world. Ye olde bristlecone Photo credit: Kosta Konstantinidis You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...
- EU Sends Obsolete Industries Mission to China
“Tough Negotiations” The European press informs us that a delegation of EU Commission minions, including Mr. JC Juncker (who according to a euphemistically worded description by one of his critics at the Commission “seems often befuddled and tired, not really quite present”) and European Council president Donald Tusk, has made landfall in Beijing. Their mission was to berate prime minister Li Keqiang over alleged “steel dumping” by China and get him to cease and...
- Gold is not Going to $10,000
One Cannot Trade Based on the Endgame The prices of the metals were down again this week, -$15 in gold and more substantially -$0.57 in silver. Stories continued to circulate this week, hitting even the mainstream media. Apparently gold is going to be priced at $10,000. Jump on the bandwagon now, while it’s still cheap and a bargain at a mere $1,322! All aboard... or maybe not? It all depends on what one wants to achieve – there's many a slip 'twixt the cup and the...
- The Real Reason the “Rich Get Richer”
Time the Taskmaster DUBLIN – “Today’s money,” says economist George Gilder, “tries to cheat time. And you can’t do that.” It may not cheat time, but it cheats far easier marks – consumers, investors, and entrepreneurs. Tempus fugit – every action humans undertake has to take time into account. In the economy, interest rates serve as the signal and regulator of the inter-temporal structure of capital. In an unhampered free market economy, they tell...
- Unsound Money Has Destroyed the Middle Class
Duped and Distorted DUBLIN – When you start thinking about what money is and how it works, you face isolation, shunning, and possible incarceration. The subject is so slippery – like a bead of mercury on a granite countertop – you become frustrated... and then... maniacal. What thinking about money can do to you Illustration by Jhonen Vasquez You begin talking to yourself, because no one else will listen to you. If you are not careful, you may be locked up among...