When Goldman Sachs Says Short Gold, It’s Time To Buy

Last week, we reported on Goldman Sachs (GS) slashing its outlook for gold and suggesting investors short the precious metal.  In a letter to its clients, analysts at the company stated “We see risk to current prices as skewed to the downside as we move through 2013. In fact, should our expectation for lower gold prices continue to prove correct, the fall in prices could end up being faster and larger than our forecast.” But given Goldman’s history, it will be difficult for many to trust this sentiment [for more gold news and analysis subscribe to our free newsletter].

Goldman Lacks Morality

Apparently, the investors who were quick to jump on the bandwagon with this statement have short-term memory loss. Are we forgetting about the subprime mortgage scandal that was just a few years ago? Shortly after the worst recession in U.S. history bottomed markets, allegations arose of Goldman defrauding investors. But the reality ended up being even worse.

In April of 2010, the SEC formally charged the company with fraud in structuring and marketing CDOs tied to subprime mortgages. The report states that  “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

John Paulson and his hedge fund, Paulson & Co, were said client, and they paid Goldman to “structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.” After just nine short months, 99% of the portfolio had been downgraded and investors in these CDOs were said to have lost more than $1 billion altogether [see also JP Morgan Escapes Silver Manipulation Charges].

Standing By Gold

Given the lack of ethics that Goldman has displayed in recent years, it is pretty difficult for investors to trust its statements, leading  everyone to question whether there are ulterior motives behind the short call and the expectation that someone, somewhere, is benefiting from it. So when Goldman says to short gold, it may be time to look for an entry point into the commodity. Curiously, gold took a massive hit just after Goldman released its negative sentiment, as the metal dipped below $1,400 yesterday for the first time since 2011.

There is no doubt that equities are on a tear right now, putting gold through the ringer. Gold prices have dropped more than 18% this year (much of which has come in the last few days since Goldman’s statement), as investors have increased their risk appetite and look to hop in on the surging market trend. But there is still a solid foundation in holding onto a gold investment [see also The Top 100 Gold Investing Blogs].

Much of the markets’ rally is due to the Fed pumping money into the system. At even the slightest hint of Bernanke pulling the plug, stocks take a big hit. If Bernanke were to ever announce an end to QE or even a drawback, you can bet that markets will endure a selling frenzy, and gold will be a major beneficiary.

The Bottom Line

If you feel that gold is simply too weak of an investment in the current environment and you wish to short it, there is nothing wrong with that. But please, make the move based on your own accord, not the recommendation of a financial giant that has had its fair share of troubles with transparency throughout the years.

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Disclosure: No positions at time of writing.