-- Posted Thursday, 19 February 2009 | | Source: GoldSeek.com
The Daily Gold Report by Peter A. Grant
Feb 19 a.m. (USAGOLD) -- Gold surged to 7-month highs versus the dollar and new all-time highs against the euro on Wednesday. Ongoing deterioration of the global economy is driving strong interest from all quarters into hard assets. Sadly there don't seem to be any signs of improvement.
The Fed released minutes from the January FOMC meeting on Wednesday, revealing rather substantial downward GDP revisions for 2009. The outlook for the housing market remains rather bleak as well. In combination, the assessments of the FOMC raise serious doubts about an economic recovery this year.
The Fed's direct purchase of US treasuries was discussed, but so far they haven't pulled the trigger. Participation in last week's record refunding was good and that probably prevented the Fed from moving to monetize debt. However, if confidence and/or interest in US debt wanes, driving rates higher, it would come as no surprise if the Fed stepped in to support the long-end of the yield curve.
The Bank of England's Monetary Policy Committee voted unanimously in favor of quantitative easing. Not surprisingly, Sterling came under pressure and the recent bounce is looking increasingly suspect. If the UK is prepared to print money and buy its own debt, can the US and Europe be far behind?
The race to the bottom is underway in earnest. Broad-based devaluation of fiat currencies are likely as governments around the world seek to reflate their economies by creating a whole bunch more money.
The euro has come under renewed selling pressure this week as well on mounting concerns about the stability of Eastern Europe. Moody's warned that many banks within the Eurozone (and Sweden) are heavily exposed to approximately $1.7 trillion in Eastern European debt that is likely to be defaulted on.
This may ultimately result in Eurozone, Swiss and Scandinavian banks needing rather substantial additional government bailouts. While the likely impact on US banks hasn't been discussed in detail as yet, unquestionably there will be some fallout. Shares in US financials remain under extreme pressure.
Stocks rebounded slightly on Wednesday after falling sharply earlier in the week. The steep drop came on Tuesday as President Obama signed the $787 bln stimulus bill into law. One could view the sell-off and the tenuous footing of equities as a rather resounding vote of 'no confidence' in the stimulus.
Former Fed chairman Alan Greenspan also stated this week that, "To stabilize the American banking system and restore normal lending, additional TARP funds will be required." Greenspan didn't suggest how much additional money it might take to stabilize the banking system, but I think it's safe to assume were talking hundreds of billions.
U.S. Bancorp CEO Richard Davis called TARP a "lousy program." "There's no A, R or P in TARP," Davis said. "Troubled" is the only word in the phrase that's accurate he added. "The 'asset relief program' has yet to occur."
GM and Chrysler presented their restructuring plans to Congress on Tuesday. Not surprisingly, this too is going to require more bailout money. The two automakers are requesting an additional $21.6 bln in loans, on top of the $17.4 bln they've already received.
Many believe that won't be nearly enough to salvage the US auto industry. A CNN article suggests the total tab could top $130 bln.
Finally, on top of everything else, another potential massive investment fraud has been uncovered. According to an SEC complaint, Stanford Group fraudulently sold up to $8 bln in certificates of deposits.
Having the safety of CDs called into question further erodes investor confidence in the entire spectrum of paper assets. Certainly massive global monetary expansion and the likelihood of quantitative easing is going to continue to erode confidence in fiat currencies the world-over.
Now more than ever, physical gold is a necessary part of every investor's portfolio.
