-- Posted Thursday, 18 September 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
Sep 18 a.m. (USAGOLD) -- Yesterday was the biggest one day rally gold has ever recorded in dollar-terms. It just goes to show how the market can coil and then explode when prices are artificially suppressed by paper sales amidst strong physical demand and ever-tightening physical supplies.
Unprecedented traffic at USAGOLD.com resulted in slowed access and page loading. Every time we increased our website's capacity, or through-put, it was immediately filled again. Our technology guru continues to work diligently to ensure that our site will be up and running when you need it most.
I also apologize for not getting a Morning Gold Report up yesterday. As you might imagine, I was on the phone assisting clients from the moment I walked in the door until well after my shift on the trading desk was technically over. Today hasn't been any different, so I'll keep it brief.
Jonathan, George and I filmed a video roundtable Tuesday morning, where we discussed the implications of mounting systemic risks for the gold market. The video couldn't have been any timelier. I began by saying, "There's no rush like a gold rush, and in fact nothing drives physical demand for gold more than systemic risks." Little did I know how that point would be driven home less than 24-hours later.
Yesterday's confirmation that the Fed would bailout insurance giant AIG with an $85 bln 2-year loan, was the beginning of a series of events that pushed the yellow metal more than $80 higher, an 11%+ gain. This move came just two days after Lehman Brothers was allowed to collapse, which indicated that the government was no longer prepared to provide lifelines to financial institutions.
However, it seems that the implications of allowing AIG to fail were simply too catastrophic. AIG is the world's largest insurance company and backs many of the complex financial instruments backed by subprime mortgages. The feeling was that if AIG failed, those policies would be void and banks would be forced to take substantial additional writedowns on those assets.
Such writedowns might drive other financial institutions to the brink of bankruptcy. Perhaps they would be allowed to fail; perhaps the government would offer support -- at this point, who knows? Either way, confidence in the financial system has been precipitously eroded already and would certainly have deteriorated further if AIG were allowed to go under, dragging additional banks down with it.
The initial spike in gold above $800 seemed to correspond pretty closely with the SEC's ban on naked short-selling of stocks. Nonetheless, the DJI plunged 449 points. The ban was viewed as an indication that the regulatory agency was worried about aggressive shorting of financial stocks, adding fuel to the systemic risk fire.
Later we heard that the Fed had asked Treasury to sell debt on its behalf to raise cash. Over the past year, the Fed has committed in excess of $600 bln in its attempt to shore-up the US financial system. Not surprisingly, these efforts have taxed even the Federal Reserve Bank. More debt may help stave off imminent disaster, but the long-term implications are quite negative as well.
News the Reserve Primary Fund had "broken the buck" further increased people's apprehension about the safety of their money. If a money market fund could no longer be trusted, where does one shelter their money? The answer of course is gold. Gold has been a store of wealth for more than 2000 years and it is once again reasserting itself as the ultimate safe-haven investment.
