-- Posted Tuesday, 4 November 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
Nov 04 a.m. (USAGOLD) -- Gold is maintaining a consolidative tone after gains last week stalled shy of the $800 level. Focus is squarely on today's US elections and investor uncertainty is likely keep market conditions rather choppy for the near-term.
The dollar may get a modest boost this week from anticipated rate cuts elsewhere in the world. The RBA cut rates by a larger than expected 75bp today. It is widely expected that the ECB will cut rates by 50bp on Thursday. The BoE is likely to cut rates by 50bp as well, but rumors are circulating about a 100bp cut.
European growth risks were reinforced yesterday with Oct manufacturing PMI revised down to a record low of 41.1. In addition, even though the ECB is pumping massive amounts of liquidity into the system, interbank lending is still virtually frozen.
This situation does not bode well for the Eurozone economy. In fact, it does not bode well for the European Union. The relatively strong economies within the EU, Germany and France specifically, are reluctant to bare the burden of weaker economies such as Spain, which have been hard-hit by rapidly falling property values and the resulting broad-based economic fallout.
This is the first time that the EU has been tested in this manner. The political aspects of the EU have already seen consistent setbacks in recent years when the EU constitution failed to pass in several key countries.
The weaknesses of the currency union have now been fully exposed. Up until recently, the weaker economies within the union -- those based primarily on export and tourism -- suffered at the hands of the soaring euro. Without a currency of their own they were unable to devalue in order to maintain market share.
Now, in just a few short months -- the euro set a record high of 1.6039 back on 15-Jul -- the shoe is on the other foot. The stronger economies are faced with the rather daunting responsibility of supporting the weaker economies at a time when everyone is suffering as a result of the credit crisis.
With the IMF already fully engaged in bailouts of Iceland and Ukraine. Further bailouts are probably going to be necessary with countries like Hungary, Belarus, Serbia and Turkey, among others in dire economic straights. The debt ratings of Poland, Romania, Lithuania, Latvia and Croatia have all plummeted in recent weeks.
The concern is that if one of these economies collapses it will trigger a domino effect, much like the Asian contagion of the late 1990s. Estimates are that it may take as much as $600 bln in bailouts to avert such a potentially catastrophic escalation of the current financial crisis. The IMF currency reserves are now approximately $200 bln.
The IMF has the option to create special drawing rights, basically creating liquidity and becoming the world's central bank. However, they are probably more likely to turn -- at least initially -- to the west for additional funding. Western Europe will probably be tapped first for further assistance in resolving the crisis on the continent. However, the US will undoubtedly be tapped as well.
How will German taxpayers react to that request to bailout Eastern Europe and the struggling economies of Spain, Italy, and Greece et al? How will US taxpayers react to a similar request?
Certainly there is heightened risk to the EU as a whole, and that is being reflected in the 23% drop seen in the euro over the past several months. Euro flight has served to bolster the dollar, but one must wonder if these gains are sustainable given the huge liquidity injections and extremely low interest rates here in America.
As America turns inward to focus on today's critical elections, it is important to remember that the financial crisis is global in nature. We've focused primarily on Europe today, but the list of countries in trouble is a long one. Pakistan is on the verge of bankruptcy. Russia, South Korea, Mexico and Brazil are spending billions in reserves to defend their currencies.
And what of the world's economic engines, China and India? A substantial slowing of the global economy is likely to have a devastating impact on these economic juggernauts, which in turn will reflect back on the world's economy as a whole.
As economies struggle, systemic risks mount and currencies devalue, more and more global citizens are going to be turning to physical gold as a means to preserve wealth. This is a trend that is already well established and seems to be on the verge of going parabolic.
The opportunity to buy gold today below $800 may indeed be the equivalent of buying gold at $300 early in the decade. Arguably there is no better asset to protect ones wealth against the global economic storm that rages on.
Gold Market Movers:
US Treasury wants to borrow record 550 bln dlrs
Treasury weighs purchasing stakes in more firms
Recession hits Europe as Club Med debt worries grow
France threatens to seize banks, German bail-outs escalate
Auto sales worst since 1983
Commerzbank taps rescue fund; SocGen profit drops 84%
China Goldmines slashes 2008 production outlook by 75 pct
