-- Posted Tuesday, 1 April 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
April 01, a.m. (USAGOLD) -- Gold has slipped below the $900 level as soft economic data and further banking sector weakness has sparked another round of deleveraging. While a wide range of commodities are under pressure and the dollar is rebounding, technical support in the yellow metal at 888.35 down to 849.15 offers a formidable downside barrier.
There have been strong indications that the weak US economy is beginning to have a negative impact overseas. Japan's Tankan index for large manufacturers fell to +11 in March, versus a reading of +19 in Dec-07. This was the lowest reading since 2004 and expectations are for further deterioration to +7 through the end of Q2.
In the Eurozone Mar PMI data confirmed that the manufacturing sector is still expanding, but the trend remains troublesome. Swiss PMI fell to 55.3, much worse than the market was expecting. Meanwhile the German employment picture improved in Mar, but retail sales unexpectedly dropped 1.6% m/m in Feb, considerably below market expectations.
The take-away from these data is that a contracting US economy is weighing on both Japan and the Eurozone. The heightened risk of a global economic contraction would have a negative impact on demand for a wide range of commodities, resulting in the broad-based retreat in this sector. Everything from grains to oil are correcting within their long-term uptrends.
Additionally, rather bleak news from the banking sector is adding to deleveraging pressures. UBS announced it would writedown an additional $19 bln related to US holdings of subprime debt. UBS will reportedly seek to raise another €15 bln in capital and Marcel Ospel will not seek re-election as chairman.
Deutsche Bank also revealed it would take a writedown of €2.5 bln in Q1. The losses are related to leveraged loans, commercial real-estate, and subprime residential mortgage backed securities.
On Monday, Lehman Brothers announced a $3 bln share offering in an effort to bolster its balance sheet. Lehman has been the subject of rumors in recent weeks that they would be the next 'Bear Stearns.'
The latest round of grim news is a clear indication that the subprime/credit/liquidity crises are far from over. Nonetheless, US plans to overhaul the regulatory structure of the markets could take years to implement.
US Treasury Secretary Paulson unveiled the Blueprint for a Modernized Financial Regulatory Structure on Monday to mixed reviews. He stressed that the largest revamp to the regulatory structure since the Great Depression would "require a great deal of discussion and many years to complete," adding that any changes "should not and will not be implemented until after the present market difficulties are past."
The proposals focus on expanding the powers of the Fed and streamlining oversight. However, many would argue that the Fed helped create the various crises in which we are presently embroiled. Chris Dodd, Democratic chairman of the Senate Banking Committee said of the plan, that it "fails to realize that the Fed helped create this crisis by ignoring the red flags as far back as five years ago. It does not make sense to give a bigger shovel to the very people who helped dig us into this hole."
Meanwhile the Financial Stability Forum, which met in Rome last week, discussed a wide range of drastic actions to mitigate the credit crisis. Those potential steps included the much discussed out-and-out purchase of mortgage backed securities by central banks. In addition, the suspension of capital requirements and taxpayer-funded recapitalization of banks were suggested. The full text of the FSF options paper can be found here.
The fact that the US and other countries are considering bold steps to stabilize the financial markets has resulted in an improved risk appetite and global equities have rebounded. However, at the same time, these measures are very troubling. All will require massive liquidity injections and many revolve around the offloading of risk from the banks onto taxpayers. While the recent round of deleveraging is understandable, I would argue that the prospect of more government bailouts stemming from increased powers and mounting bank losses is a strong reason to buy gold.
If real-estate values continue to fall, so will the value of the mortgaged backed securities at the center of the crisis. If some of these MBSs ultimately end up on the books of the Fed, BoE and ECB, we'll all be paying the price for poor decision making on the part of the banks. We also run the risk of a huge global currency devaluation as governments attempt to prop up the banking sector. Buying gold offers the best hedge against such an eventuality.
The dollar is recovering, spurred by deleveraging pressures and the improved appetite for risk. The dollar index is back above 72.00 as the greenback benefits from flows out of the safe-haven currencies. Weaker oil has also contributed to an improved dollar picture, but gains are thought to be corrective in nature. Additional debasement of the dollar are likely to result from further interest rate cuts and liquidity infusions to underpin the banking sector. The dominant trend remains bearish.
Jewelry demand remains brisk on this extension to the corrective phase, which should help limit the downside as gold gets into support. Again, we'll be watching platinum for an early indication of a bottoming pattern. Platinum remains well off the 1804.00 corrective low from two weeks ago and the tighter supply fundamentals should result in jewelry and investment demand materializing in this market first.
Gold Market Movers:
US ISM for Mar up slightly to 48.6, versus 48.3 in Feb.
US construction spending for Feb dropped 0.3%, better than expected, versus -1.0% in Jan.
Canada industrial production in Feb up 0.1%, below market expectations.
Final Eurozone PMI for Mar 52.0, while Swiss PMI drops to 55.3.
UK PMI for Mar steady at 51.3, while output prices hit record high.
German retail sales fall 1.6%.
Japan Tankan for Mar drops to 11, versus 19 in Dec-07.
UBS announces $19 bln writedown. Deutsche Bank reveals a $3.9 bln writedown.
Gold tumbles below $900 as mounting bank losses spur sell-off
China's great leap into bullion investment
Indians buying up gold?
