Founded in 1869, Goldman Sachs (GS) is one the world’s leading investment banking and securities firms. Goldman is famous for the work ethic it demands, its ability to attract the brightest your minds and that indefinable X-factor that comes from being acknowledged as the “best game in town.” The predictions and opinions of their employees are widely followed and have been known to influence the market. Alumni of the company include former US Treasury Secretary Robert Rubin, former Governor of New Jersey John Corzine, former US Treasury Secretary Henry Paulson, and famed TV show host and investor Jim Cramer.
However, over the past few years Goldman’s reputation has been damaged. Besides the very public civil-fraud lawsuit filed against GS by the SEC in 2010, much of the American public accuses GS in playing a major role in causing the 2008’s financial crisis, which even in the midst of GS paid its top managers multi-million dollar bonuses. Many people also claim Goldman was relying on its alumni network in Washington to insulate it from the consequences of the failure of AIG.
Now, instead of just looking at GS with awe and deference, people are suspect of the investment bank. Within the past six months GS has changed its investment opinion three times concerning commodities. While this is commonplace for an active retail trader, it’s not necessarily typical for an investment bank.
In December 2010 GS advised their clients to invest in crude oil, copper, cotton, and platinum (CCCP). Four months later these commodities had gained about 25% when on April 12th, 2011 GS published a report advising their clients to close out on the trade. “Although we believe that on a 12-month horizon the CCCP basket still has upside potential, in the near term risk-reward no longer favors … the basket,” said Goldman’s commodity team in a research note. The company argued that the high oil price, and the economic damage caused by the Japanese earthquake and tsunami, was likely to dent demand for copper and platinum.
That same day, April 12th, Brent crude oil and US crude oil each dropped about $3, on the back of this GS report. The market did seem to temporarily shake off GS predictions for the next three weeks, yet during the first week of May oil plummeted more than 15% in just a few days. Though they might have been three weeks early, that’s still some impressive timing.
Yesterday, on May 24th, 2011 GS reversed its tune on commodities turning bullish once again. GS suggested buying oil, copper, and zinc. “The risk/reward once again favors being long commodities,” Jeffrey Currie, head of commodities research at Goldman Sachs in London, wrote in an e-mailed report. “Economic growth will likely be sufficient to tighten key supply-constrained markets in the second half, leading to higher prices.” Yesterday, Brent crude oil advanced as much as 1.5%, US crude oil closed up 1.64%, and copper was up 0.6%.
The question I put to the Stock Enthusiast readers today is – Do you think that GS simply employs the smartest research analysts who able to time the market with impressive precision? Or do you think they are using their power and influence to actually move the commodity markets themselves? Please leave your comments below.