Example of Agency Problem: Goldman Sach’s Seeming Poop and Scoop on Gold

US financial giant Goldman Sachs announced to the public “a sell on gold” as early as December 2012 and continued to do so as the gold market crash last April.

The Zero hedge reports that what Goldman clients sold, Goldman bought. (bold and italics original)

In early April, the status quo was exuberant when none other than Goldman Sachs issued a "sell" on the barbarous relic that has become so indicative of the exuberance of central planning. At the time, we were skeptical (to say the least) and, just for extra Muppetting, the bank also suggested its clients buy Treasuries. Well, now that the full details of holdings changes have been released for Q2, it is perhaps clearer than ever before that as the bank was telling its clients to "sell, sell, sell" it was itself "buy, buy, buy"-ing the Gold ETF (GLD) with both arms and feet. In Q2, Goldman Sachs added a stunning (and record) 3.7 million 'shares' of GLD. As Paulson dumped his GLD, Goldman lapped it up to become the ETF's 7th largest holder.

Goldman was the largest adding holder for GLD...

buying what its clients were selling in size...

The attempt to drive down prices in order to purchase them at a bargain by spreading false information or rumors is called Poop and Scoop. Though technically illegal this is hard to prove.

But the more important lesson is one of the principal agent dilemma or the agency problem or the conflict of interests between the clients and industry participants as I explained here.

It is imperative for the public to scrutinize and not just accept hook line and sinker on the information sold by industry participants because they can be camouflaged by interests that may run counter to those of investors.