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.
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: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- Gold Sector: Positioning and Sentiment
A Case of Botched Timing, But... When last we wrote about the gold sector in mid February, we discussed historical patterns in the HUI following breaches of its 200-day moving average from below. Given that we expected such a breach to occur relatively soon, the post turned out to be rather ill-timed. Luckily we always advise readers that we are not exactly Nostradamus (occasionally our timing is a bit better). Below is a chart of the HUI Index depicting the action since the January...
- India: The next Pakistan?
India’s Rapid Degradation This is Part XI of a series of articles (the most recent of which is linked here) in which I have provided regular updates on what started as the demonetization of 86% of India's currency. The story of demonetization and the ensuing developments were merely a vehicle for me to explore Indian institutions, culture and society. The Modimobile is making the rounds amid a flower shower. [PT] Photo credit: PTI Photo Tribal cultures face...
- The Long Run Economics of Debt Based Stimulus
Onward vs. Upward Something both unwanted and unexpected has tormented western economies in the 21st century. Gross domestic product (GDP) has moderated onward while government debt has spiked upward. Orthodox economists continue to be flummoxed by what has transpired. What happened to the miracle? The Keynesian wet dream of an unfettered fiat debt money system has been realized, and debt has been duly expanded at every opportunity. Although the fat lady has so far only...
- Welcome to Totalitarian America, President Trump!
Trump vs. the Deep State If there had been any doubt that the land of the free and home of the brave is now a totalitarian society, the revelations that its Chief Executive Officer has been spied upon while campaigning for that office and during his brief tenure as president should now be allayed. Image adapted from the cover of “Deep State #5” - depicting an assassin from the future President Trump joins the very crowded list of opponents of the American...
- Boosting Stock Market Returns With A Simple Trick
Systematic Trading Based on Statistics Trading methods based on statistics represent an unusual approach for many investors. Evaluation of a security's fundamental merits is not of concern, even though it can of course be done additionally. Rather, the only important criterion consists of typical price patterns determined by statistical examination of past trends. Fundamental considerations such as the valuation of stocks are not really relevant to the statistics-based trading...
- Searching for Truth
Heresy or Truth? RANCHO SANTANA, NICARAGUA – In the fifth century, Christian scholars counted 88 different heresies. Arianism. Eutychianism. Nestorianism. If there was a way to “offend” God, they had a name for it. One group of “heretics” argued that there was no such thing as “original sin.” Another denied the trinity. And another claimed Jesus was not divine. Which one had the truth? Depiction of the first Council of Ephesus in 431 AD, convened by Emperor...
- March to Default
Style Over Substance “May you live in interesting times,” says the ancient Chinese curse. No doubt about it, we live in interesting times. Hardly a day goes by that we’re not aghast and astounded by a series of grotesque caricatures of the world as at devolves towards vulgarity. Just this week, for instance, U.S. Representative Maxine Waters tweeted, “Get ready for impeachment.” Well, Maxine Waters is obviously right – impeaching the president is an urgent...
- Why the 21st Century Sucks - Turtles All the Way Down
A Truly Sucky Century BALTIMORE – What an awful century! Worst we’ve ever seen. Household incomes are down. Employment is down, with 7 million people in the U.S. of working age without jobs. Productivity growth is down. GDP growth is down – to only about 0.5% per capita last year. Even life expectancies are down. Drug overdoses are up. Suicides are up. One out of every eight children lives in a family getting food stamps. One of out every eight adults takes psychoactive drugs...
- Gold and the Fed's Looming Rate Hike in March
Long Term Technical Backdrop Constructive After a challenging Q4 in 2016 in the context of rising bond yields and a stronger US dollar, gold seems to be getting its shine back in Q1. The technical picture is beginning to look a little more constructive and the “reflation trade”, spurred on further by expectations of higher infrastructure spending and tax cuts in the US, has thus far also benefited gold. From a technical perspective, there are indications that the low at $1045.40,...
- The Unstable Empire – A Campfire Tale
Campfire Tale Caesar: The Ides of March are come. Soothsayer: Ay, Caesar, but not gone. — Julius Caesar, Shakespeare GRANADA, NICARAGUA – Today, we stop the horses and circle the wagons. For 19 years, we have been rolling along, exploring, discovering. We began with the assumption that we didn’t “know” anything - so we kept our eyes open. Now we know even less. Famous people who knew nothing and were not shy to admit it: Sergeant Schultz...
- Off the Beaten Path in Mesoamerica
Greeted by Rooster There’s an endearing quality to a steadfast rooster call at the crack of dawn when overheard from a warm country farmhouse. There’s a reassuring charm that comes with the committed gallinaceous greeting of daybreak that’s particularly suited to a rural ambiance. The allure of a morning cock-a-doodle-doo somehow falls flat in all other settings. Good morning everyone! Before meteorological forecasts were available on TV and smart phones, people...
- Why Silver Went Down – Precious Metals Supply and Demand
Rumor-Mongering vs. Data The question on the lips of everyone who plans to exchange his metal for dollars—widely thought to be money—is why did silver go down? The price of silver in dollar terms dropped from about 18 bucks to about 17, or about 5 percent. Reportedly silver was already assassinated in the late 19th century... so last week they must have assassinated its corpse. [PT] Illustration taken from 'Coin's Financial School' The facile answer is...