-- Posted Wednesday, 8 October 2008 | Digg This Article
| Source: GoldSeek.com
TARP is Apparently No Panacea
Oct 09 a.m. (USAGOLD) -- Gold continues to attract safe-haven buying after the passage of TARP proved not to be the panacea Treasury was hoping for. Gold has moved back above the $900 level, spurred by very strong demand and increasingly tight supplies of physical product.
The DJIA extended losses on Tuesday, dropping another 500 points. Yesterday's tumble comes on the heels of Monday's initial plunge below the 10,000 level. However, it appears equities may get some relief today in the wake of coordinated central bank rate cuts. Stock futures are presently suggesting a higher open.
The Fed, ECB, BoE, SNB, BoC and Riksbank all cut their policy rates by 50bp. This joint move, along with recent massive injections of capital -- above and beyond the TARP plan -- are another last ditch effort to free up global credit markets.
China also cut rates, for the second time in less than a month. Hong Kong slashed rates by a full 100 bp.
With Fed funds now at 1.5%, there are precious few bullets in the chamber if things don't improve soon. Fed funds futures remain well bid, despite the emergency rate cut. Another 25bp rate cut is full priced in for this month and there is a 25% chance for a Fed funds target of just 1%.
What happens when Fed funds are at 1%? Does the Fed lower further and potentially launch our own lost decade, ala Japan in the 1990s?
The Fed and Treasury still have a number of additional tricks up their collective sleeves, including the latest scheme to purchase unsecured commercial paper. Direct investment in troubled companies both inside and outside of the financial sector is an option as well. And of course there is always the printing press.
Flooding the market with liquidity hasn't been much help thus far. The next step might be to ramp up liquidity operations to what one might consider to be an unimaginable level. Such a move would likely remove the last tenuous underpinnings of the dollar. At that point, we risk a full-fledged currency crisis.
At this point, as with bailouts and liquidity facilities past, there is little to suggest that we are anywhere near the end of the current market crisis. In fact, one has to wonder what additional burden the US taxpayer may ultimately be asked to bear if things fail to stabilize soon.
The dollar has been bolstered in recent weeks by an ongoing exodus from other currencies as credit market contagion continues to percolate around the globe. However, as confidence erodes in the various currencies, they lose value against gold. If the dollar does ultimately cut loose, gold will move sharply higher in reaction.
Given the unprecedented demand for physical gold we have seen in recent weeks, I think it is just a matter of time before the physical price of gold completely decouples from the paper price. That, or paper is going to have to play some serious catch-up based on the realities of the physical market.
Jug Keiner, the CEO of Swiss Asia Capital went so far as to predict the failure of the paper market gold on CNBC the other day. He suggested that the price of gold could well double.
Back in April, Mike Kosares the president of our firm, predicted in an article entitled Golden Gut Check, that a shortage of gold was likely based on developed and developing fundamental trends. In his most recent article, The Chickens Come Home to Roost, Mike concedes, "Little did I know just how voracious the public appetite for gold would become."
These are extraordinary times in the financial markets. I'd like to think that we will eventually emerge from this crisis, wiser and more resilient. However, the response of the various governments around the world is basically setting us up for more of the same in the future.
Keep that in mind when things settle down again. Accumulate physical gold on a judicious and regular basis so that you are well prepared to weather the next financial storm before the clouds darken the horizon.
Gold Market Movers:
Treasury: 'Severe dislocations' in market for notes, bonds
Central banks launch rate cut
UK launches bank bail-out
Spain creates €50 bln bank rescue fund
PBoC cuts rates by 27bp
Big Shift in Gold Fundamentals: Central Banks Not Rolling Forward Gold Leases
Germans Stockpiling Gold Amid Market Panic
Opinions expressed in commentary on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.
-- Posted Wednesday, 8 October 2008 | Digg This Article | Source: GoldSeek.com
