-- Posted Monday, 24 March 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
March 24, a.m. (USAGOLD) -- Gold has stabilized in the wake of last week's corrective retreat, after downticks stalled ahead of the $900 level. Investors may still be a little tentative about getting back into the market given the recent volatility, but in truth, little fundamentally has changed in the past week. We may end up looking back at last week's retreat as 'the' buying opportunity of 2008.
The past week has allowed closer examination of the Bear Stearns fiasco and it sure seems like a major meltdown of the US banking system was narrowly averted by Fed intervention. One might be tempted to side with those that suggest Bear should have been left to fail and work its way through bankruptcy. However, the Ambrose Evans-Pritchard piece, referenced below in Market Movers, builds a pretty compelling case that the Bear rescue was a rescue of the whole system.
The amount of risk taken on by some our country's financial institutions in the form of mortgaged back securities, collateralized debt obligations, credit default swaps and a host of other more obscure derivatives products is absolutely staggering. Did they really think that property values would continue to go up indefinitely? Was it truly possible in their minds that subprime borrowers would always be able to pay at least the minimums once rates began to adjust higher?
There remains a massive and tangled web of complicated financial vehicles out there that have been leveraged to the hilt. This is a ticking time bomb with an equally convoluted web of counterparty risks. The Fed has set precedent by bailing out Bear, assuming at least $30 billion of the riskier assets on their books. The banks remain supremely suspicious of each other and are reluctant to lend money amongst themselves. They, along with Wall Street, will continue to wonder: Who's next? Further rescues and liquidity injections must be considered and this systemic risk bodes well for gold.
Despite massive doses of liquidity by the Fed in recent weeks, the credit markets remain gridlocked. All this newfound liquidity, along with the recent cuts to the Fed funds and discount rates, has had a significant debasing effect on the dollar. However, the banks seem to be using the money to shore up their own balance sheets. The absence of interbank lending and the fact that lower rates are not being passed along to consumers is hastening the decent into recession.
Many would argue that the US is already in a recession; the requisite two quarters of negative GDP growth just haven't been recorded yet. The specter of recession should keep the stock market on the defensive. As money leaves the stock market, a significant percentage is likely to find a home in gold.
We can also anticipate that the Fed will maintain an accommodative monetary policy to lessen the impact of a recession. Lower interest rates translate into a lower dollar, making a gold an increasingly attractive alternative asset.
In addition, we expect that the funds will be back in the market buying gold after the end of Q1. It was profit taking on the part of the funds, seeking to lock in gains ahead of the end of the quarter that sparked last week's sell-off. Once they come back in, it is likely that we'll be back above $1,000 in fairly short order.
Market Movers:
Europe closed for Easter Monday holiday
Fed TAF auction: $50 bln in 28-day funds
US existing home sales for Feb at 10:00ET. Market is looking for 4.850M, versus 4.890M in Jan.
Ambrose Evans-Pritchard: Fed's rescue halted a derivatives Chernobyl
US ponders: How deep is economic abyss?
Stock index futures suggest a higher open on Wall Street.
