-- Posted Wednesday, 2 April 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
April 02, a.m. (USAGOLD) -- Gold has stabilized somewhat in the wake of Tuesday's drop below the $900 level, having found support within the 875.00/849.15 zone. Recent losses are attributed to deleveraging across a wide range of commodities and the dollar, as well as an improved appetite for equities.
Despite renewed banking sector writedowns, global stocks continue to firm. Stocks got support from positive reaction to capital raising efforts by Lehman Brothers and UBS. One might have expected the opposite reaction, as these capital raises are needed to bolster rather shaky balance sheets.
The market may have gained some comfort from sweeping US proposals to overhaul the regulatory structures of the market. Treasury Secretary Paulson unveiled the Blueprint for a Modernized Financial Regulatory Structure on Monday. Mr. Paulson made it clear that implementation of this plan would take years, and likely wouldn't even be attempted until well after the present market turmoil is over. Despite criticism of the plan from many quarters, the market seemed to like it.
The US plan along with an options paper that came to light on Tuesday from the Financial Stability Forum, gave a strong indication that the Bear Stearns rescue was not a one-off event. It now seems clear that governments are prepared to do whatever is necessary, including the possibility of taking some rather radical steps, to prevent the collapse of any major financial institution. Comforting on one level, with respect to underpinning shares, but extremely troubling on another level.
The market is going to continue to wonder who the next Bear Stearns might be. The market had been casting a suspicious eye at Lehman, causing a sharp drop in their stock. Lehman has made claims about abusive short-selling as traders bet on their suspected collapse. Of course that is the way the market is supposed to work.
Bear Stearns also complained that hedge funds maliciously spread rumors about their impending demise. Rumors that Bear vehemently denied, right up to the point where they went bust and had to be rescued in a joint effort by the Fed and JPMorgan.
Did market speculation hasten the collapse of Bear? Probably. Was it the cause? I doubt it. The market was keenly aware of Bears massive exposure to subprime debt. They played fast and loose during the heyday of MBSs, CDOs, CDSs and a host of other complex derivative products. They leveraged themselves to the hilt in exchange for massive profits. They apparently just didn't see the deflation of the housing bubble coming. Bad call, bad results. Once again, this is the way the market is supposed to work.
The fact that US taxpayers now must assume the risk of at least $30 bln of Bear Stearns riskiest assets understandably sticks in our collective craws. We certainly didn't participate in the windfall profits as the property bubble inflated and the valuations of their subprime debt vehicles soared.
That other banks that made similar bets are likely to be bailed out, and in fact already have been as a result of the Fed's injection of huge amounts of liquidity is disconcerting at the very least. The infusion of capital along with steep cuts to the Fed funds and discount rates have a very negative impact on the dollar and spur inflation. We're all paying the price for their bad decision-making.
The fact that the banks are hoarding cheap money proffered by the Fed to bolster their balance sheet, rather than passing it along to borrowers at the consumer level just adds insult to injury.
Any stabilization of the credit/liquidity crisis is contingent on home values stabilizing. It is the underlying value of the real estate that makes up the mortgage-backed securities and collateralized debt obligations that are the root of the problem. Data to support any speculation that home prices have found a bottom have not been forthcoming.
So we wait for the next shoe to drop, while the Fed continues to lower interest rates and central banks continue to pump liquidity. Another rate cut of 25bp is fully priced in by the market for 30-Apr, with odds running around 12% for a larger half-point cut. Look for those odds to increase if Friday's payroll number disappoints. The market is looking for a decline of 50k in nonfarm payrolls in March, versus -63k in Feb.
Recent gains in the dollar stalled well shy of the mid-Mar corrective highs against a number of currencies. While the dollar index continues to trade above the pivotal 72.00 level, the corrective high from 21-Mar at 73.19 remains well protected. Similarly protected is the high in the USD-CHF rate from 24-Mar 1.0250. We can also call the 20-Mar low in the GBP-USD rate at 1.9735 technically intact.
The corresponding low in the EUR-USD rate at 1.5342 (24-Mar) isn't even remotely in jeopardy at this point. With a potential double top evident, a more convincing challenge of the previous corrective low cannot be ruled out. However, claims that the dollar has seen a reversal of fortune are wildly premature.
In fact the euro is modestly underpinned today by the marked increase in Eurozone PPI to 5.3% y/y in Feb. Despite the recent suggestion by the IMF that the ECB has room to move on rates, this strong inflationary indication suggests that a cut to the refi rate is unlikely to be seen any time soon. Euro strength is more readily apparent on a cross-rate basis against low-yielders.
If the dollar has indeed met resistance and sinks back into the recent range, one would expect gold to go on the mend as well. A declining dollar makes gold increasingly more attractive as an alternative asset.
The subprime/credit/liquidity crises are far from being resolved and systemic risks to the banking system remain a real concern. Additionally, the US economy remains in, or certainly on the verge of, a recession and the IMF sees a 25% chance of a global recession. These factors, along with the anticipated resumption of the long-term downtrend in the dollar, the possibility of global currency devaluations and heightened concerns about inflation make the recent retreat an excellent opportunity for investment/safe-haven buying of gold.
Gold Market Movers:
US factory orders for Feb -1.3%, well below market expectations, versus -2.3% in Jan.
Bernanke speaking before JEC says economy could contract in first half, but continued liquidity measures will be supportive.
US ADP employment survey for Mar +8k, well above market expectations, versus -23k in Feb.
US MBA mortgage market index for week ended 28-Mar -28.7%.
Eurozone PPI for Feb 5.3% y/y, above market expectations, versus revised 5.0% in Jan.
Power crisis to last years if no demand cut-Eskom
IMF cuts global forecast on worst crisis since 1930s
Turk: Another look at the bull market in commodities
Jewelry buying 'encouraging for gold futures'
