-- Posted Thursday, 12 February 2009 | | Source: GoldSeek.com
The Daily Gold Report by Peter A. Grant
Feb 12 a.m. (USAGOLD) -- Gold remains firm having pushed through important resistance at 929.37/930.10 on Wednesday. This was a rather bullish technical event, targeting the 950/960 zone initially, but potential at this point is back to 988/1,000.
On Tuesday the US government pledged to commit up to an additional $3 trillion dollars in an effort to combat the ongoing financial crisis. The much debated American Recovery and Reinvestment Act of 2009 barely cleared the Senate with a 61-37 vote. A compromise $789 bln package moved quickly through conference committee yesterday and is likely to be signed by President Obama within days.
Treasury Secretary Geithner also announced another huge government program to absorb up to $1 trl worth of toxic assets from the banking system. Meanwhile the Fed will be supplying up to another $1 trl in financing to help free up credit markets.
On Tuesday the stock market gave the Geithner plan a resounding 'thumbs-down,' with the DJIA falling over 300 points. The consensus was that Geithner's announcement lacked sufficient detail to inspire confidence. Not the least of which remains valuation of toxic assets.
To inspire private participation in the so-called "bad bank" investors are going to be looking for steeply discounted prices. Meanwhile the banks can ill-afford to simply let the market start determining the value of the toxic assets on their books. The result would be more substantial write-downs for the banks.
I had an interesting piece of research come across my desk last week. The report was dated the last week in January. The author pointed out that Dow Jones' unwritten rule is that when your shares fall below $10 you get booted from the index. That means Citi and BofA shouldn't even be part of the DJIA any more.
Nonetheless, the research showed that (at the time) if all four financials in the DJIA (Citi, BofA, Amex and JPMorgan) were allowed to fall to zero, it would equate with a 331.25 drop in the index. That's less than the 382-point loss that we saw on Tuesday.
That presents an interesting question, why not let them declare bankruptcy, go into government receivership for a period, rise from the ashes if able and if not...good riddance. This ongoing exercise of bailout and liquidity schemes is growing tedious and monumentally expensive for the American taxpayer.
As for the stimulus bill, there was much backslapping and congratulatory hand pumping in Congress yesterday, but the treasury market is essentially voting 'no confidence.' Good interest in this week's massive refunding means investors are turning to the relative safety of low yielding treasuries rather than the stock market. Yields have bounced this morning on the better than expected Jan retail sales figure (+1.0%).
The implication is that the $789 bln stimulus simply isn't going to be enough. Long serving Democratic Congressman David Obey from Wisconsin said the other day on CSpan that the stimulus package will not solve any of the woes but would only minimize the problem.
Seems like we should be getting a little more than minimization for $789 bln. Imagine how the American taxpayer is going to react if six or twelve months from now the government is pitching yet another stimulus.
Imagine how they might react if $3 trl, on top of everything else that has already been spent, simply isn't enough. Imagine what impact that might have on the dollar. Imagine where that might send gold.
