-- Posted Thursday, 3 April 2008 | Digg This Article | Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
April 03, a.m. (USAGOLD) -- Gold has probed back above the $900 level after Fed Chairman Bernanke acknowledged the possibility of recession in testimony before the JEC on Wednesday. This theme was repeated in front of the Senate Banking Committee this morning. With oil consolidating and the dollar still somewhat supported, scope is seen for further base-building activity in the yellow metal before it ultimately resumes its uptrend.
The following are the two headline quotes from Mr. Bernanke's testimony on Wednesday:
"Overall, the near-term economic outlook has weakened relative to the projections released by the Federal Open Market Committee (FOMC) at the end of January. It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly.
We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies; and growth is expected to proceed at or a little above its sustainable pace in 2009, bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions. However, in light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high and the risks remain to the downside."
The acknowledgement by the Fed that we could see a recession in the first half, despite stimulus measures already taken is big news. However, the stock market has only retraced a relatively small percentage of the huge gains recorded early in the week. One can only surmise that the market believes the survivability of financial institutions has essentially been guaranteed by the Fed/Treasury. We've heard the 'Bernanke put' referenced in the past and it seems to be an option that the stock market likes, at least for the time being.
Nonetheless, risks to the global banking system remain and the Fed, along with a number of other central banks are going to have to keep pumping liquidity into that system. An update from a private source that does a continuation of the M3 measure of money supply, suggests that money supply is now growing at an annualized rate near 20%.
You may recall that the Fed stopped reporting M3, the broadest measure of money supply, in Mar-06. Their claim at the time was that M3 didn't convey any additional information over M2. Personally, I'm not inclined to believe there was some great conspiracy to hide the data.
A very well respected economist friend of mine told me that due to expansion and definitional changes to various asset classes, all of the measures of money supply are "...fairly arbitrary and meaningless. I wouldn't know what to do with M3 even if it were still reported."
Nonetheless, the trend in money supply is clearly evident in the chart below. A trend that is troubling with respect to the implications for inflation. Note the acceleration and divergence of the various measures from the point we went off the gold standard in 1971. It is also worth noting that M3 had gone fairly parabolic at the point they suspended reporting that data.
It seems incredibly hypocritical for Congress to call the oil companies on the carpet for $100+ a barrel prices and record profits, when you don't have to look much further than the above chart to find the real culprit. Not that congress has any control presently over monetary policy, but they have to be aware of the cause and effect, right?
The fact that Congress will be considering expanding the powers of the Fed as a result of the present financial crisis is troubling in many respects. The Fed's easy monetary policy in the wake of the bursting of the tech bubble and 9/11 is a major reason why we're in the mess we're in. The above chart, and expectations of more of the same in terms of monetary policy - lower interest rates and massive liquidity injections - is about as compelling a case for sharply higher gold prices as you can find.
Gold Market Movers:
WSJ is reporting that Fed examiners are on site at 5 major brokerage firms.
Bernanke repeats yesterday's comments before the Senate Banking Committee.
US ISM-NMI for Mar up slightly to 49.6, above market expectations, versus 49.3 in Feb.
US initial jobless claims for the week ended 29-Mar up 38k to 407k, much higher than the market was looking for.
Gold rises on speculation dollar's rally versus euro may stall
Gold back above $900 an ounce as dollar loses steam