GOLD futures dropped sharply Friday following news U.S. securities regulators charged Goldman Sachs (GS) and one of the bank's vice presidents with fraud, a case that also involves one of the word's biggest gold buyers.
Investors fled gold, perceived risky due to its short-term volatility, after the Securities and Exchange Commission said Goldman Sachs defrauded investors by misstating and omitting key facts about a financial product tied to subprime mortgages.
Gold for June delivery, the most actively traded contract, fell $23.40, or 2 per cent, to settle at $1,136.90 an ounce on the Comex division of the New York Mercantile Exchange. Thinly traded nearby April futures dropped $23.40, or 2 per cent, to $1,136.30 an ounce.
"People are just dumping" riskier assets, said Ira Epstein, director of the Ira Epstein division of The Linn Group, an asset management and brokerage firm.
The SEC said Goldman Sachs failed, in particular, to disclose the role that major hedge fund Paulson & Co. Inc. played in structuring so-called synthetic collateralized debt obligations, despite the fact that the fund had bet against the products' performance.
As of the end of 2009, Paulson & Co. was the largest institutional holder of the SPDR Gold Trust (GLD)--the world's largest physically backed gold exchange-traded fund--with 31.5 million shares valued at $3.38 billion.
Revelations of the hedge fund's involvement in the dispute between Goldman Sachs and the SEC raise questions about a factor that's helped drive gold to record-high prices above $1,200 an ounce--Paulson's high-profile bets.
"The bull market might be a false bull market in gold," said Keith Springer, president of Capital Financial Advisory Services in Sacramento, Calif.
A Paulson spokesman wasn't immediately available for comment. In a statement, the fund said: "As the SEC said at its press conference, Paulson is not the subject of this complaint, made no misrepresentations and is not the subject of any charges."
The SPDR ETF buys gold off the market to back shares that are designed to track the price of the commodity. When holders sell their shares, gold comes back on to the market.
"The growing fear amongst institutional gold investors is that strong sales out of the ETFs would drive gold prices lower," said Adrian Ash, head of research at BullionVault, an online gold and silver exchange based in West London.
"So while Paulson & Co. aren't being charged--and there's nothing to suggest they acted improperly or will have to repay any gains--short-term gold traders clearly didn't need much excuse to sell hard," Ash said in an email.
Shares in Goldman Sachs tumbled almost 13 per cent, dragging down U.S. equities. The Dow Jones Industrial Average was down more than 1 per cent on the news. Treasurys traded higher.
Goldman Sachs, in a statement, called the accusations "completely unfounded in law and fact."
Gold futures have been in an uptrend recently as investors have taken an increasing shine to the metal, which has rallied more than 11 per cent from a multimonth low in February.
The Goldman news Friday offered many the perfect excuse to lock in profits from recent gains, said Charles Nedoss, senior account manager and metals analyst with Peak Trading Group.
"This was the excuse to sell," Nedoss said
Before the Goldman news, the metal was already on shaky footing Friday on uncertainty over how concerns over Greece's debt would be resolved.
Euro-zone finance ministers meeting in Madrid on Friday addressed the issue of Greek debt but offered no specifics on how a plan might be implemented. The ministers are also to meet on Saturday.
Greece, in a letter on Thursday, asked the European Union and International Monetary Fund for formal discussions to begin on an aid package, although the cash-strapped country has not yet formally asked for aid.
The ongoing Greek debt saga has been a key driver of the amount of risk investors want to take in various market sectors in recent weeks, alternately pressuring or supporting perceived riskier holdings like metals, high yielding currencies and equities.
Other precious metals traded in New York also lost ground Friday after the Goldman charges were announced. Comex May silver lost 75.8 cents, or 4.1 per cent, to settle at $17.675 an ounce. Nymex July platinum fell $31, or 1.8 per cent, to settle at $1,695.30 an ounce while June palladium on the exchange dropped $14.05, or 2.6 per cent, to settle at $531.85 an ounce.
Settlements (ranges include open-outcry and electronic trading):
London PM Gold Fix: $1,151.50; previous PM $1,154.50
Spot gold at 2:57 p.m. ET: $1,136.45, down $22.59; Range: $1,130.10-$1,160.40
June gold $1,136.90, down $23.40; Range $1,130.00-$1,161.20
May silver $17.675, 75.8 cents; Range $17.610-$18.440
July platinum $1,695.30, down $31.00; Range $1,687.60-$1,729.30
June palladium $531.85, down $14.05; Range $524.60-$547.65
