Feb 04 a.m. (USAGOLD) -- Gold has turned consolidative to mildly corrective in the wake of last week's initial challenge of the October high at 930.10. While this important level has capped the upside thus far, there doesn't seem to be much selling interest up here given the absence of risk appetite.
The global bailout bonanza continues this week with Japan announcing that they will spend up to ¥1 trillion ($11.2 bln) to buy shares held by banks. This supported the Japanese stock market briefly on Tuesday, but gains proved unsustainable as poor earnings outweighed the latest bailout.
China's premier Wen Jiabao suggested that his country is considering additional stimulus as well. This would be on top of the 4 trillion yuan ($585 bln) package that was launched late last year.
Wen believes that stimulating domestic demand in China will help revive the global economy. As we discussed in our latest VideoBrief, he's also faced with mounting risk for social unrest. It has been reported that as many as 20 million workers in China have lost their jobs as a result of the global economic crisis.
Australia did announce a second stimulus package worth A$42 bln ($26.5 bln). Most of those moneys will be spent on infrastructure, schools and housing, but about 30% will be used for cash handouts to lower and middle-class earners. Those stimulus checks are slated to go out next month.
The RBA also cut the official cash rate by 100bp to a record low of 3.25%. Yet in comparison to the rates paid by many advance economies, including the US (0%), that's a pretty lofty interest rate. Nonetheless, the positive impact on the A$ was limited and the currency remains within striking distance of the critical .6075/.6006 lows.
Norges Bank cut their policy rate today by 50bp to 2.50%. They also indicated that further rate cuts might be in the offing.
The ECB is expected to leave their refi rate at 2.00% when they announce policy tomorrow, due to reduced price risks. However, there are growing expectations for another rate cut in March. Economic data coming out of the Eurozone clearly showing that risks to growth remain substantial.
All the while our own $884 bln stimulus package is working its way through Congress. We can expect ongoing debate in the Senate over what is true stimulus and what is just plain pork, but some version of the nearly $1 trillion package is likely to reach President Obama's desk in fairly short order.
This week there has also been considerable global concern voiced about the seemingly protectionist "Buy American" clause in the US stimulus package. The worry is that if the US turns inward to favor American manufacturers that other countries will do the same, initiating a global trade war.
The last thing the world needs right now is a trade war on top of everything else. Talk about potential for accelerating the global contraction.
It doesn't make any sense to turn protectionist at the same time that we will be desperately relying on the rest of the world to finance our trillion-dollar-plus deficit spending. How do you cut Chinese steel manufacturers out of the US stimulus package, while simultaneously expecting them to buy massive quantities of US treasuries?
Meanwhile the Fed rather quietly extended the deadlines for its existing liquidity programs and dollar swap arrangements from 30-Apr-09 to the end of October. The deadline for the Fed's huge Term Asset-Backed Securities Loan Facility (TALF) remains 31-Dec-09.
We're understandably focused to a large degree on our own country's bailouts, stimulus plans and liquidity schemes. However, it's important to remember that the economic crisis is global in nature. Every country of the world is scrambling to prevent to collapse of their own economy -- seeking to stimulate, slashing interest rates, pumping liquidity, and printing fiat currency.
These actions, while debatably in the best interest of the individual countries, can have substantial and dire unintended consequences elsewhere in the world. It's difficult to know where the next unexpected shock may come from. Beware the unintended consequences and protect yourself accordingly.
This mentality goes a long way toward explaining why demand for physical gold, from all corners of the globe remains -- to say the least -- robust.
