23
Jul
2008

Gold Investments Market Update – U.S. Bankruptcy To Become A Foregone Conclusion?

Gold

Gold finished trading in New York yesterday at $948.20, down $15.20 and silver was down 44 cents to 17.93. Gold continued to fall in Asia and in early European trading it is down by nearly 1.3%.

Gold was due a correction after its recent surge in price and remains up some 6% in the last month (from $882 to $935) unlike oil and the majority of stock markets (which are down by similar amounts). Gold’s recent outperformance may have led to a bout of profit taking and further consolidation is likely prior to challenging the March highs of $1030 per ounce in the coming weeks.

Yesterday, gold showed considerable strength in early European trading but subsequently fell sharply due to another steep fall in oil prices (down by some 3%), a strengthening dollar (up nearly 1%) and increasing risk appetite on the rallying stock market. And this despite deteriorating financial data as seen in the fact that U.S. home prices fell a record 4.8 percent in May from the same month last year and Wachovia and other U.S. banks posted dismal results. Banks are suffering as the nation’s housing crisis deepens, making it harder for consumers, businesses and homebuilders to make the repayments on their loans.

While oil remains an important factor in influencing the gold market, we remain confident that there will be a gradual decoupling between oil and gold in the coming months. Already this month gold is up some 5.2%, while oil is down some 6.4%. Gold will continue to outperform oil as oil is a commodity that is far more subject to demand destruction in the face of a sharply deteriorating global economy than gold. Gold has both commodity and currency credentials and it’s gold’s finite currency and safe haven credentials that will assume increasing importance in the coming weeks due to increasing macroeconomic and systemic risk.

Paulson and Plosser Verbally Manipulate Dollar off Dangerous Record Lows

The dollar recovered from near record lows against the euro yesterday after more jawboning from Philadelphia Fed President Charles Plosser and Treasury Secretary Henry Paulson. The continuing attempt to verbally manipulate the dollar higher from near record lows is destined to fail as actions speak louder than words. Talking the talk regarding a strong dollar being “very important” to U.S. national interests is all well and good but actions speak louder than words and this is more pretence monetary hawkishness.

The only action likely to stop the dollar from falling to new record lows against most major currencies and stopping an even sharper depreciation of the dollar in global currency markets is for the Federal Reserve Chairman, Bernanke to begin rising interest rates and for the pork barrel and massive military expenditure of the recent profligate ‘Bush years’ to be consigned to the dustbin of history.

Negative real interest rates will result in the dollar continuing to depreciate, possibly sharply, in the coming months causing even greater inflation and no amount of soothing words and political jawboning will be able to stop this.

U.S. Bankruptcy To Become A Foregone Conclusion?

Paulson, Plosser, Bernanke and Bush would do well to study the report published by the Federal Reserve Bank of St. Louis in July/August 2006, which states that “Unless the United States moves quickly to fundamentally change and restrain its fiscal behavior, its bankruptcy will become a foregone conclusion.”

The Federal Reserve Bank Report continues “Given the reluctance of our politicians to raise taxes, cut benefits, or even limit the growth in benefits, the most likely scenario is that the government will start printing money to pay its bills. This could arise in the context of the Federal Reserve “being forced” to buy Treasury bills and bonds to reduce interest rates. Specifically, once the financial markets begin to understand the depth and extent of the country’s financial insolvency, they will start worrying about inflation and about being paid back in watered-down dollars. This concern will lead them to start dumping their holdings of U.S. Treasuries. In so doing, they’ll drive up interest rates, which will lead the Fed to print money to buy up those bonds. The consequence will be more money creation—exactly what the bond traders will have come to fear. This could lead to spiraling expectations of higher inflation, with the process eventuating in hyperinflation.”

Today’s Data and Influences

The data/events calendar picks up today with the Federal Reserve’s Beige Book due for release later.

Most of the focus in the early part of the day, however, will be on the UK, with the minutes of the last BoE policy meeting due for release as well as the CBI Industrial Trends survey for July. The central bank left its base interest rate at 5% on the 10th of July. The minutes are due to be published at 9:30 a.m. today. This morning, the market is expecting an 8-1 vote in favour of keeping rates on hold, with David Blanchflower the only member calling for a cut.

Gold and Silver

Gold is trading at $934.20/934.80 per ounce (1130 GMT).
Silver is trading at $17.45/17.50 per ounce (1130 GMT).

PGMs

Platinum is trading at $1745/1755 per ounce (1130 GMT).
Palladium is trading at $389/395 per ounce (1130 GMT).

Mark O'Byrne
Executive Director