Gold Falls on Goldman Sachs Revelations; Icelandic Volcano Ramifications Assessed

Gold
Gold fell 2% last Friday resulting in a loss of 2.1% for the week. The majority of the markets fell on the news regarding the SEC’s investigation of alleged fraud by Goldman Sachs. Oil and some other commodities were particularly hard hit. Gold has fallen below $1,130/oz in European trade this morning and could now fall to support at $1,110/oz.

Air freight restrictions have not affected the physical bullion market and premiums remain stable (see News). Gold is currently trading at $1,127.80/oz and in euro and GBP terms, gold is trading at €839/oz and £740/oz respectively.

The Goldman news would normally be bullish for gold as gold remains a hedge against financial risk but, as has happened recently, it led market participants to sell all assets and pile into perceived safer assets such as  the dollar. Technically, gold was already in a corrective mode prior to the revelations and they may have exacerbated gold’s recent correction. In recent years gold has displayed a correlation with the major US equity indices but only in the very short term. This was seen again on Friday (see chart). This short term correlation is due to speculative leveraged trading by investment banks and hedge funds. However, over the long term gold is not correlated with equities and major indices such as the benchmark S&P 500. This can clearly be seen in the performance of gold versus the S&P 500 in the last 10 years (see chart).

It is hard to believe that an investigation into and increasing attacks on Goldman Sachs by regulators and governments (Gordon Brown engaged in populist rhetoric over the weekend attacking the “moral bankruptcy” of Goldman) could be anything but gold bullish. Especially given that Goldman Sachs is the largest investment bank on Wall Street and has been one of the major beneficiaries of the crash through its close relationship with Washington and the White House. While risk averse traders with short term horizons may liquidate all positions and move to dollars more long term passive money will continue to allocate funds to gold.

The economic ramifications of the Icelandic volcano for the already fragile eurozone economy is being assessed but it is safe to say that the severe disruption to travel which is affecting business travel, tourism, air freight and imports and exports in the eurozone will not help matters. Especially as sovereign debt concerns about Greece, Portugal and Spain remain.

Gold and the S&P 500 – 6 DAY  (Tick) – Gold’s Short Term Correlation
Click on the image to view full size.

Silver
Silver fell 4% and was thus down 3.7% for the week. Silver has dropped from $17.66/oz to $17.51/oz this morning in Asia. Silver is currently trading at $17.55/oz, €13.05/oz and £11.51/oz.

Platinum Group Metals
Platinum is trading at $1,678/oz and palladium is currently trading at $523/oz. Rhodium is at $2,950/oz.

Gold and the S&P 500 – 10 Year  (Weekly) – Gold’s Long Term Non Correlation
Click on the image to view full size.

News
Air freight disruptions are “not a problem” for the gold market in London because supplies are always available through the lending market, Stewart Murray, chief executive officer of the London Bullion Market Association told Bloomberg. “There is a lot of gold in London and a very active lending market,” Murray said by phone today. “I honestly haven’t heard anyone saying this is a problem.”

The disruption to air travel has yet to effect precious metals, UBS Ltd. analyst Edel Tully said in a report.  “While not yet in the disruptive zone, we’ll be closely monitoring premiums over the coming days,” Tully wrote.

EU transport ministers were to hold a video conference Monday on the volcanic ash cloud blowing across Europe, which has left millions of passengers stranded around the globe. With European air traffic officials still designating much of the continent a virtual no-fly zone for a fifth straight day Monday, airlines were urging a rethink of airspace restrictions as test flights showed no problems.

The International Air Transport Association (IATA) said today that European governments’ response to the volcano crisis was inadequate and estimated its economic impact on airlines to be greater than the 2001 September 11 attacks.

Gordon Brown has said he was "shocked" at the "moral bankruptcy" alleged against the Goldman Sachs. The bank (NYSE: GS – news) faces the prospect of investigations in the UK and Germany. The Prime Minister called for a "special investigation" into Goldman’s activities. It came as the bank prepares to pay out £3.5bn in bonuses and announce first-quarter profits of almost $4bn (£2.6bn) this week, in the face of a US investigation by the Securities and Exchange Commission (SEC) over securities fraud.

Mark OByrne

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