What's Goldman's Real Position on Gold?

Zero Hedge, a popular financial blog, reports its finding that Goldman Sachs has advised clients to sell Gold (GLD) despite raising its price target on the soaring commodity. Goldman's reports are dated this month in its Market Pulse Asset Management evaluation and strategy. You can view the report and the Zero Hedge article here.

After reading through the flashy Market Pulse, it's difficult to understand what Goldman Sachs is advising in relation to their analysis. Overall, the investment firm does see some sort of U shaped recovery in the US running into 2011, but before that happens, the economy will slide some more. Most important, its strategy on gold:

"[Goldman] shifted our stance on gold after years of being long; see gold as vulnerable to central bank inactivity int he face of rising deflation risk."

True, the Fed has run out of ideas, but we see that they have not given up their fight against the economic slow down, especially with QE-lite (reinvesting capital in Treasury bonds). However, Goldman even states that they have moderated their view on deflation due to "increased prospects of quantitative easing." What are you really telling us Goldman?

I doubt the Fed will just sit back, even if they don't take monetary action, the words of Bernanke on the state of the economy are much significance to market volatility, and real data doesn't lie.

There are probably many reasons why Goldman's Market Pulse is cloudy, but my guess is that as a market maker, they are trying to buy at a dip, by causing a dip. GLD is in the midst of a secular bull market, and Goldman and pals want in. By pals, I mean Eton Park Capital Management, a hedge fund founded by Goldman's youngest partner, Eric Mindich. This firm joined Paulson and Soros in making GLD its largest common stock position at $800 million. Goldman is likely taking a similar position.

I reached out to my friend who's a trader to try and figure out what's really going on. He was quite frank in saying "Goldman is covering their butts. Remember, clients are sitting on paper assets so they are not in favor to push GLD." This also makes sense. Goldman can either use this as a cover or enter at a dip to offset some losses from their large client base invested in paper assets.

Either way, the takeaway is further confirmation that GLD is continuing its bull run.
*chart above is YTD GLD Bloomberg*