-- Posted Wednesday, 26 November 2008 | Digg This Article
| Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
Nov 26 a.m. (USAGOLD) -- Gold remains well bid above $800 in the wake of last Friday's upside breakout of the 681.65/776.80 range, which had contained activity for nearly 4-weeks. Clients calling in to make purchases of physical gold have been citing their concern about bailouts and the likely impact on the dollar. Those concerns are well founded.
Last week's release of robust physical demand data for gold, along with ongoing weakness in the stock market, may have played an important role in triggering the breakout. However, interest in physical gold has been heightened this week with the continuation of the seemingly never-ending stream of bailouts and schemes to keep the US financial markets from imploding.
Yesterday the Fed announced a new $600 bln program to purchase the direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Bank, as well as MBSs backed by Fannie, Freddie and Ginnie Mae. The Fed also announced the creation of the $200 bln Term Asset-Backed Securities Loan Facility (TALF) to support the issue of asset-backed securities collateralized by student loans, auto loans, credit card loans, etc.
In announcing these two programs, Treasury Secretary Paulson said, "[M]illions of Americans cannot find affordable financing for their basic credit needs. And credit card rates are climbing, making it more expensive for families to finance everyday purchases. This lack of affordable consumer credit undermines consumer spending [and] as a result weakens our economy."
Mr. Paulson might have thought to consider some comment about the responsible use of credit. The overuse of cheap credit is arguably one of the root causes of the financial crisis. Living within one's means is prudent advise for individuals and governments alike, but the latter is certainly not living up to any such expectations and they seem to be encouraging the former to borrow and spend more, while saving less.
So we have an additional $800 bln in liquidity announced this week, on top of the $20 Citigroup lifeline from Monday. That probably puts the total amount of lending and bailouts associated with the ongoing financial crisis in excess of $5,000 bln.
A Bloomberg article from Monday suggests that the government's pledge to back $306 bln in Citi toxic debt -- that's above and beyond the $20 bln lifeline -- has pushed the US taxpayer's exposure over the $7.7 trillion mark.
Anyone who thinks the wave of new money is likely to end here should consider that the auto industry has not secured their bailout yet and that more industries are likely to be lining up in Washington with tin-cup in hand as well. It's probably just a matter of time before States and municipalities, struggling under the weight of growing budget deficits and a soft or nonexistent muni market, turn to Washington for help as well.
Goldman is at the trough once again, selling $5 bln in notes backed by the FDIC under the new TLGP. Guidance was 220 bp over treasuries, but pricing came in lower at 200 bp over. Given the relative success of this offering, we can expect other financial institutions, such as Citi, to tap this program as well. Estimates suggest the total offerings through TLGP could end up being as high as $350 bln.
The new Obama administration is also making a fiscal stimulus package one of their first orders of business. Early estimates put the price tag as high as $700 bln.
Where does it end? Might total lending and bailouts double from here? Only time will tell, but the truth is that government is only limited by the amount of paper and ink they can acquire (or bytes they can key in). However, investors are starting to consider the long-term implications for the dollar and they are understandably worried.
With $4 trillion already sloshing around the system, I don't see how serious debasement of the dollar -- and a resulting wave of inflation -- can be avoided. Imagine the implications of $8 - 10 trillion in new liquidity.
However, inflation may be exactly what the Fed is hoping for; viewing it as the lesser of two evils in comparison to the deflation risks now apparent. What better way to foster government sponsored inflation than lower interest rates to near 0% and generate a seemingly endless stream of new cash?
The vulnerability of the dollar and low yields on treasury products are going to make such investments increasingly less attractive. The dollar index fell back below 85.00 yesterday, suggesting potential back to the 20-day moving average around 84.20. Below that, the late-Oct low at 83.10 would be back in play.
The dollar may finally be succumbing to the ongoing surge in money supply. Many investors who have moved into cash and treasuries over the past several months are going to be reevaluating those positions, especially if CPI starts edging higher. The resiliency of Oct core CPI was perhaps an early warning of what may be in store.
If investors start seeking an alternate shelter from the economic crisis that will also protect them from a decline in the dollar and inflation, physical gold is likely to be a huge beneficiary of outflows from money market funds and treasuries. The recent demand figures suggest that may already be happening.
Gold's move above $800 is encouraging for a challenge of the 835.19/856.93 resistance zone, where a number of key chart points, retracement levels and the 100-day moving average all converge. A push through this zone would shift focus back to the 10-Oct high at 930.10.
Gold Market Movers:
US durable goods orders plummeted 6.2% in Oct.
US initial jobless claims fell 14k to 529k for the week ended 22-Nov.
US 10-year yield approaches all time low.
PBoC cut lending rate by 108bp to 5.58%.
Brussels proposes €200bn stimulus
AIG closes $40 bln stock placement with Treasury under TARP
U.S. pledges top $7.7 trillion to ease frozen credit
After 'GD2' in 2011, a 100-year bear market?
U.S. details $800 billion loan plans
Democrats' stimulus plan may reach $700 billion
U.S. commits over $5.704 trillion in financial rescue
