-- Posted Tuesday, 16 September 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
Sep 16 a.m. (USAGOLD) -- Gold has been underpinned by the collapse of Lehman Brothers and mounting systemic risks. Monday's sharp plunge in the stock market sent people scrambling for the shelter of safe-haven investments, including the yellow metal.
The DJIA tumbled 504 points on Monday, in the worst one-day point decline since 9/11. Rising concerns about the US and global financial system have weighed on overseas stocks as well. In a declining and increasingly vulnerable equities market, investors historically move money into cash and/or treasuries.
However, yields on money market accounts are presently around 2.4%, while the yield on a 10-year note is about 3.38%. CPI for Aug came out this morning with inflation running at 5.4% y/y. Arguably the true inflation rate is closer to 9%. Obviously real rates of return on cash and treasuries are negative. I suspect it's just a matter of time before we see increased interest in gold for its wealth preservation aspects.
Despite very strong physical buying interest, gold has been unable to recapture the $800 level thus far. Ongoing broad-based deleveraging amidst the growing financial crisis has helped to keep gold relatively suppressed.
The resiliency of the dollar is playing a role in keeping gold below $800 as well. The DX was unable to sustain recent probes below 78.00, despite increasing expectations that the Fed is more likely now to cut interest rates than to raise them.
Odds of a 25bp rate cut today by the Fed surged as high as 68% in earlier trading before moderating somewhat. Those odds were just 8% this past Friday, before the ongoing credit crisis moved into the latest disturbing phase. There has been talk that the Fed might actually cut rates by as much as 50bp in an effort to stimulate the economy and ease pressure on the stock market.
Such a drastic move seems unlikely; given the fact that inflation is and will continue to be a serious issue. Energy and food prices have indeed retreated in recent weeks, but at the same time central banks are absolutely flooding the markets with liquidity as they attempt to free-up seized credit markets. The Fed announces policy at 14:15 EDT today.
At this point, you can still get a significantly higher yield elsewhere in the world. The following is a short list of prevailing interest rates: New Zealand 7.5%, China 7.2%, Australia 7.0%, Korea 5.25%, UK 5.0%, Sweden 4.75%, Eurozone 4.25%, Canada 3.0%, Switzerland 2.75%. It is quite likely that interest differentials may increase further over the next couple of months, if not today. The Fed announces policy at 14:15 EDT.
Interesting that the dollar remains relatively well bid, without any change to the fundamentals that drove it to new all-time lows just nine short weeks ago. All eyes will be on the Fed to see how they choose to react to the worsening financial crisis.
They have already added massive amounts of liquidity to the market and are accepting increasingly questionable assets from banks in exchange for treasuries. Both are dollar negative. If they choose to cut rates as well, the dollar should continue to retrace recent gains, which should in turn bolster the gold market.
The stock market has extended lower today, but losses have been limited by the expectation of a rate cut. If the Fed disappoints by holding steady on rates, equities could come under additional selling pressure. If the Fed does opt to hold steady, they'll make an effort to compensate by providing a very strong indication in the policy statement that they are prepared to ease if market conditions warrant.
The potential that we could see the dollar come back under pressure, along with growing systemic risks is making gold look increasingly attractive as an alternative investment. Given the fact that traditional safe-haven investments are providing a negative yield and you have another pretty compelling reason to seek shelter in the yellow metal.
Gold Market Movers:
US TIC data for Jul shows net outflow of $74.8 bln.
US CPI for Aug -0.1%, below market expectations. Inflation rate at 5.4% y/y.
Goldman Q3 profits plunged 70%
ECB pumps 70 bln euros into money markets
Bank of England to inject $35.9 bln. into money markets
Gold rises as stock markets tumble
Central banks open up spigots in bid to ease fears
Lehman fails, cops get caught eating doughnuts
AIG's credit ratings slashed as Wall Street drama intensifies
Mad rush for gold as prices dip
Banks cover gold shorts, but not silver, yet
