-- Posted Monday, 31 March 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
March 31, a.m. (USAGOLD) -- Gold is consolidating at the lower end of Friday's range, awaiting US Treasury Secretary Paulson's comments on a major regulatory overhaul in response to the recent market turmoil at 10:00EDT today. With the dollar still near historic lows and oil within $5 of the all-time highs, downside potential in the yellow metal is thought to be limited.
Later this morning the treasury department will unveil their Blueprint for a Modernized Financial Regulatory Structure. The changes are expected to be focused on three objectives; market stability, safety and soundness with government backing and business conduct.
Short-term goals are likely to be centered on coordination and streamlining of regulatory efforts. However, based on a weekend interview with the WSJ, Mr. Paulson is expected to recommend that the Fed be granted "broad powers so they could go anywhere in the system they needed to go."
Many would argue that it was the Fed's extremely accommodative monetary policy in the wake of the technology bust and 9/11 that caused the problems we are seeing today. Efforts taken thus far by the Fed to mitigate the various financial crises, such as deep cuts to the Fed funds and discount rates, and massive liquidity injections have not been terribly effective.
The Fed led rescue of Bear Stearns, and the ultimate buyout by JPMorgan has come under increased scrutiny. The legality of the Fed brokering of a deal between the two banks, and particularly the backstopping of $30 bln in toxic Bear debt has been called into question. Bear Stearns shareholders are up in arms, which resulted in a five fold increase to JPMorgan's bid, from $2 to $10 per share. Nonetheless, Congress may still step in and break-up the deal.
Fed strategists have reportedly been in contact with the Scandinavian central banks, seeking details on how Sweden, Norway and Finland managed their financial crisis in the early-90s. The Scandies took 100% control of any bank whose equity had fallen below zero. They did not allow shareholders to make any money off of a bailout, as has been the case with Bear Stearns. Banks that were nationalized were subsequently re-floated or merged. Might the Fed be considering a similar plan as part of their potentially expanded powers?
In that aforementioned interview, the Treasury Secretary conceded that most of the blueprint would not be implemented until well after the current market turmoil is past. The market will be watching his comments closely for any surprises and for a clear indication of what any new regulatory structure might look like. A modestly lower open is expected on Wall Street today.
The dollar is maintaining a generally defensive tone amid safe-haven flows into the yen and Swiss franc. The dollar index remains below 72.00. If nothing substantively different on regulation is going to happen in the short term, one might expect the Fed to continue on its dollar-debasing path of rate cuts and liquidity injections. Rumors that the Fed, along with other central banks, may actually start buying mortgaged backed securities continue to make the rounds. If the dollar resumes its slide, gold should move back above $1,000.
Oil softened modestly on expectations of lower demand resulting from weak economic outlooks in the US and Japan. Easing tensions in Iraq have also weighed on the market, but oil remains in close proximity to the all-time highs. The weak dollar should help to limit the downside for energy.
Platinum is comfortably back above $2,000 on expectations of further load shedding by South African power utility Eskom. While power cuts for today were canceled, the platinum market remains in deficit so heightened concerns about supply is going to be amplified. We expect strong platinum to have a supportive impact on the gold market.
Gold Market Movers:
Chicago PMI for Mar rebounded to 48.2, better than market was expecting, versus 44.5 in Feb.
Canadian GDP for Jan was up 0.6%, slightly better than market expectations, versus -0.7 in Dec.
Eurozone economic confidence for Mar fell to 99.6.
ECB adds €15 bln in 1 day refi.
Treasury set to announce regulatory overhaul
'Trillion Dollar Meltdown' paints scary economic picture
Fed eyes Nordic-style nationalisation of US banks
South Africa: Eskom halts Monday's load shedding plans
Dollar heads for biggest quarterly loss against euro since 2004
