Goldman Sachs Breaks Gold's Back

After climbing for the last few weeks, the metals and petroleum markets broke quickly to the downside on Friday. The markets fell apart on news that the Securities and Exchange Commission (SEC) had filed a civil suit against Goldman Sachs for the Wall Street firm's involvement in fraud.

Although one might not expect the tumble in precious metals and petroleum to be directly attributed to the Goldman Sachs case, traders became concerned that Goldman might be forced to liquidate sizable investments in those sectors. Shortly after the news broke, gold futures fell over $30 per ounce, while silver fell more than 80 cents per ounce, and crude oil fell $2.50 per barrel.

When the dust had settled on Friday afternoon, May crude oil was near $83 per barrel (-3%), while June gold was trading near $1135/oz (-2.5%).

Copper, heating oil, and gasoline also experienced huge sell-offs. Foreign currencies likewise fell apart as many traders ran to the U.S. Dollar in an effort to protect their assets in a "safe" currency. The Canadian Dollar and British Pound took the largest losses on the day. Treasury bond futures were the single winner on the news, moving up nearly one full point as stocks, metals and petroleum markets collapsed.

Bonds

The Treasury bond market edged up this week on news that inflation did not appear to be an impending threat to the U.S. economy. The Central Bureau of Statistics announced on Wednesday that the Consumer Price Index for March rose by 0.1%. Historically, when our government fears rising inflation, the Federal Reserve has raised interest rates to "put the brakes" on the economy. Holders of U.S. bonds interpreted the CPI report as assurance that the value of their bonds would not be eroded by potential interest rate hikes by the government. Bond prices were up around 1% on the week, trading on Friday at 116-26.

Grains

Unlike the financial markets, the agricultural markets showed strength, even towards the end of the week. Corn, soybeans, wheat and hogs, all closed higher compared to last Friday, with the May contracts at $3.62, $9.84 and $4.85 per bushel, respectively.