-- Posted Monday, 17 March 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
March 17, p.m. (USAGOLD) -- Once again, I must apologize for the delay in posting this report. The phones here have been ringing non-stop since I walked in the door at 4:00AM Denver time. My first responsibility is to take care of our clients' needs and then get the report up as quickly as possible.
Gold extended to the upside in overseas trading on Monday, reaching a new record high at 1032.20 in Asia. Growing concerns about the stability of the US and global banking systems, the plummeting dollar and firm oil are driving forces behind the recent gains.
Gold initially cracked the important $1,000 psychological barrier on Friday when it was announced that Bear Stearns was getting bailed out by the Fed and JPMorgan due to a "significant deterioration" of their liquidity position. Over the weekend, JPMorgan bought Bear Stearns for a startling $2 a share. The deal was cobbled together quickly in the hope of easing concerns before the Asian stock markets opened on Monday. Nonetheless, global stocks are showing nothing but red.
Treasury Secretary Henry Paulson on Sunday defended the bailout of Bear Stearns and reiterated that the government stands ready to do whatever is necessary to ease market turmoil. Of particular concern was his avoidance of questions pertaining to other financial institutions in trouble. I think we all know the answer to that.
With other financial institutions likely in the same straights as Bear, mounting concerns about systemic risks is driving safe-haven buying of gold, the yen and Swiss franc. Global equities, particularly the financial sector, and the dollar are baring the brunt of this flight to quality.
Over the weekend the Fed made a number of announcements: They approved the terms of the JPMorgan buyout of Bear Stearns, which includes the Fed funding up to $30 bln of Bear's less-liquid assets. The Fed also lowered the discount rate by 25bp to 3.25%. The Fed also announced another new lending facility.
The Primary Dealer Credit Facility (PDCF) will offer overnight lending to primary dealers. The goal of this facility is to provide financing for participants in the securitization markets. Acceptable collateral includes: all collateral eligible for tri-party repurchase agreements arranged by the Federal Reserve Bank of New York, as well as all investment-grade corporate securities, municipal securities, mortgage-backed securities and asset-backed securities for which a price is available. The PDCF is expected to be in place for at least six months. However, the Fed has said they would extend the term if market conditions warrant.
The new facility adds additional liquidity to a market that is already awash in cash (or soon to be) as a result of last week's announcement of the TSLF, which will see $236 bln in liquidity from the Fed and other central banks hit the market in coming weeks. Additionally, the Fed recently announced that they would increase in March TAF auctions to $100 bln. All this liquidity hasn't really done much to free up the nation's credit markets, but it has severely debased the dollar.
The dollar has plummeted to new all-time lows against the euro and Swiss franc, and another new 12-year low against the yen. The yen and the Swiss franc in particular have been benefiting from the all-out flight from the dollar as a result of their safe-haven status. The USD-JPY rate tumbled through our 97.10/45 target and 96.00 (24-Aug-95) was surpassed as well. There's really not much support until a minor band of congestion at 92.00/90.00. Further out, the all-time low at 79.85 (19-Apr-95) is looking increasingly attractive.
USD-CHF fell to .9636 in overseas trading after initially testing below parity on Friday. Potential is now toward the .9300 level. EUR-USD ticked above the 1.5900 level before slipping back into the range. Sights are on the 1.6000 level next.
Despite persistent talk about the possibility of joint intervention to halt the dollar's slide, it has yet to materialize. The market is going to want to test the resolve of the central banks so look for the dollar to continue to test the downside. I've heard speculation that the ECB threshold is around 1.6200 for the euro.
The implied yield on the Apr Fed funds contract is 1.95%, suggesting a 100bp rate cut is likely tomorrow. Deferred contracts are now trading below 1.50%. I was originally thinking the Fed might ease by 50-75bp and save some bullets, but now I'm not so sure. The prospect of further rate cuts going into the second half of the year will keep the pressure on the dollar. As the dollar continues its slide, gold should remain on track for tests of $1,078.13 and $1,148.60 based on Fibonacci projections.
Gold Market Movers:
US industrial production for Feb fell 0.5%, much worse than market expectations, versus +0.1% in Jan.
US Cap utilization for Feb was 80.9% versus 81.5% in Jan.
US Empire State index for Mar plunged to -22.2, well below market expectations, versus -11.7 in Feb.
US TIC inflows for Jan fell to $37.4 bln, versus $72.7 bln in Dec.
JPMorgan buys Bear Stearns for $2 a share.
