-- Posted Thursday, 5 March 2009 | | Source: GoldSeek.com
The Daily Gold Report by Peter A. Grant
Mar 05 p.m. (USAGOLD) -- Gold adopted a corrective tone over the past week, initially knocked off the highs by options related selling in the futures market. The decline then built on itself as weak stops were triggered and large amounts of scrap reportedly hit the market.
The ongoing relentless sell-off in the stock market may be playing a role in gold's correction as well. The DJIA fell below the 7000 level this week for the first time in more than 11-years. Even more troubling was the drop of the S&P 500 -- a much broader measure of the market -- below 700, its lowest level since October 1996.
As shares continue their plunge, financial firms will frequently liquidate profitable positions -- like in gold for instance -- to offset margin calls and to simply raise capital. This selling usually occurs in the paper market and physical gold buyers are generally happy to buy on these dips, which has helped to underpin the market around 900.00.
UBS research noted this week that long-dated TIP spreads have been falling, suggesting that inflation concerns are waning. The market watches the spread between conventional Treasury obligations and Treasury Inflation Protected Securities (TIPS) as a gauge of inflation expectations.
The theory is that all the recent bad data raises the risk of short-term deflation, which has a tendency to weigh on gold (at least initially). However, given the fact that the Fed and Treasury, along with their counterparts in most of the other industrial nations, are committed to preventing deflation at all-cost, my read on the recent TIP spread action is a little different.
Falling TIP spreads may just be a much needed market correction, and the same can be said for the yellow metal. However, the retreat of TIP spreads may also be a harbinger of additional massive monetary expansion by the various governments of the world as they attempt to stave off a deflationary spiral.
Governments, including the one here in the United States, have made it abundantly clear that they are prepared to throw as much money as is necessary at the financial crisis to halt deflation. They are willing to concede inflation, viewing it as the lesser of two evils.
Be assured, they'll get the inflation that they want. The real trouble will come when they try and stuff that genie back in the bottle.
Of course they claim that they'll be able to drain off excess liquidity fast enough to prevent hyperinflation. That remains to be seen, but I find it difficult to believe. I have a hard time envisioning the government is going to establish all manner of new spending initiatives only to starve them of funds down the road when inflation takes hold.
Physical gold is still a critical component of the modern portfolio. With support around the 900.00 area technically intact, the yellow metal is staging a strong rebound today. A move above 932.65 (Monday's high) and 952.46 (halfway-back point of the recent correction) will return considerable credence to the underlying uptrend.
