Jan 29 (USAGOLD) -- Gold rebounded sharply intraday, recapturing the $900 level follow a short-lived uptick in risk appetite. The recent trend high at $915.60 is back within striking distance. Above that, the key level seen as the trigger for a near-term move back above $1,000 is well defined at $930.10 (10-Oct-08 high).
It has been an interesting week with the market now drawing the conclusion that the financial crisis is far from over, and the governments of the world are likely to throw a whole bunch more money at the problem.
Here in the US, the CBO has suggested that banks may still require "hundreds of billions" in additional bailout moneys before all is said and done. The latest proposal calls for the FDIC to form a "bad bank" to aggregate toxic assets from the banks. In a Wall Street Journal article today, they put the number at $1-2 trillion.
Buying troubled assets...what a novel idea! That's exactly what TARP was supposed to be used for in the first place. Now we find that more than half of the original $700 bln in TARP funds have been spent buying shares in banks, with some diverted to the US auto industry, with little or no positive impact.
A congressional review panel concluded on 09-Jan-09 that, "In particular, the Panel sees no evidence that Treasury has used TARP funds to support the housing market by avoiding preventable foreclosures". The panel also said "Although half the money has not yet been received by the banks, hundreds of billions of dollars have been injected into the marketplace with no demonstrable effects on lending."
Now they are once again considering buying the troubled assets. The suggestion has been that the FDIC might issue guaranteed bonds to fund this new "bad bank." This seems to amount to collateralizing these toxic assets all over again.
It was just this past summer as the banking crisis worsened and a number of banks folded, there was much talk about how under-funded the FDIC was. If the FDIC guarantees bonds issued on toxic assets how does that impact the agency's primary responsibility of insuring deposits held in banks and thrift institutions?
According to the FDIC's own website: "FDIC deposit insurance is backed by the full faith and credit of the United States government. This means that the resources of the United States government stand behind FDIC-insured depositors."
However, on Wikipedia it says that the statutory basis for this claim is less than clear. Congress, in 1987, passed a non-binding resolution to this effect, but there appear to be no laws strictly binding the government to make good on any insurance liabilities unmet by the FDIC.
One also has to wonder who would be interested in buying debt backed by toxic assets at this juncture. The logical conclusion is that the Fed, possibly in conjunction with Treasury, would be that buyer.
Of course the new facility might also just borrow directly from the Fed. The central bank certainly hasn't had any compunction about growing its balance sheet over the past year.
In a NY Times article, Senator Charles Schumer (D-NY) said, "The size of the problem is so large that no one knows if you just wiped out all the assets, how much it would cost." He added that a number of officials estimate it may take up to $3 trillion to $4 trillion to buy the bad assets.
On Wednesday at the conclusion of the two-day FOMC meeting the Fed once again said that they were considering buying US treasuries outright to support the long-end of the yield curve. In fact, Jeffrey Lacker of the Richmond Fed voted to move ahead with monetization of debt.
According to the FOMC policy statement, Mr. Lacker "preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs."
On top of all the aforementioned monetary expansion, an $800+ bln stimulus package is making its way through Congress. It seems like the global economic system will soon be awash in dollars.
The dollar remains relatively supported at this point as risk aversion drives flows into the perceived safety of the dollar. However, I think gold will ultimately win out as one of the only true safe-haven investment.
A couple other drivers of interest in physical gold:
Tough talk at World Economic Forum, particularly from China and Russia, about the risks associated with the dollar being the world's sole reserve currency.
More 'Madoff-like' ponzi schemes discovered recently, further eroding investor confidence and driving demand for hard assets that can be touched.
French strike and protest the government's handling of the economic crisis, the biggest in 20-years. European governments have recognized the risk of growing social unrest following the collapse of the Icelandic government and protests elsewhere on the continent.
