Mark Hulbert Not Impressed By Rationale For Gold Plummet

Evidently, the explanation for gold's drop on Friday has achieved mantra-like status - enough to get Mark Hulbert skeptical about it. That rationale says Goldman's legal trouble involved John Paulson, who might face pressure from his investors to liquidate some of his gold holdings.

Hulbert takes the rationale seriously, by assuming that 30% of Paulson's total hedge-fund holdings are in gold ETF and gold-related holdings, and that 10% of those holdings would have to be sold due to client redemptions. Even under this scenario, which also assumes that clients of Paulson & Co. can pull out whenever they want, it would have led to the sale of about $1 billion' worth of gold and gold-related securities. That amount's little more than a drop in the bucket.

Hulbert's point, after the debunking is through, is made in the conclusion:

Why, then, do so many gold traders nevertheless believe that gold's weakness is being caused by Paulson & Co.'s involvement in the Goldman Sachs mess? My hunch is that their willingness betrays too much underlying complacency, if not outright bullishness -- a sentiment condition that, according to contrarian analysis, is not conducive to much higher prices....

Indeed, one of the hallmarks of such a sentiment condition is otherwise mysterious air pockets in the market -- just what we've witnessed over the last couple of trading sessions.

In other words, the run-down would have happened anyways. The Goldman story just drained the air pocket.