Derivatives = Financial Weapons of Mass Destruction, Buffet likes Gold

Gold Gold was down some 1.1% or $11.10 to $975.00 per ounce in trading in New York yesterday and silver was down some 2.3% or 49 cents to $20.13 per ounce. In Asian trading gold rose to $984.75 but has sold off slightly in early European trading. The London AM Gold Fix at 1030 GMT this morning was at $978.50, £486.14 and €635.18.

While gold is overbought technically in the short term and due a correction, any correction is likely to again be short and shallow as the fundamentals supporting gold remain extremely sound. With stock markets internationally under pressure after more poor economic data in the U.S. yesterday ( home foreclosures in the fourth quarter reached new record highs), gold’s safe haven attributes should mean that it remains well bid and should challenge the psychological level of $1,000 in the coming weeks. Record high oil prices and the continuing fall in the value of the dollar (see FX Commentary below) and a general increase in macroeconomic and indeed systemic risk is rightly leading to risk aversion and a flight to quality. All eyes will be firmly fixed on the February non-farm payrolls report due this afternoon. Should they confirm the markets’ worst fears (a fall of some 110,000) then we will we see more of the same in financial markets – selling off of risky paper assets and a flight to the quality of sounder paper assets, currencies and hard assets. Stocks in the financial sector internationally have sold off and the immediate catalyst may have been a new blow with news of a default at Thornburg Mortgage Inc.. Thornburg is the second-largest independent mortgage lender in the United States and is primarily a "jumbo" mortgage lender, and not a subprime lender. This is a clear indication that the credit crunch is deepening and now affecting far more than simply subprime mortgages. The financial and economic news goes from the bad to worse and the Financial Times and Wall Street Journal are not happy reading – particularly this morning. The credit markets came under renewed strain on Thursday as investors showed heightened risk aversion and even shunned the debt of Federal sponsored housing finance guarantee agencies, Fannie Mae and Freddie Mac. http://www.research.gold.org/prices/daily/ Carlyle Capital Corporation , a major private equity firm with a $21.7 billion portfolio and an affiliate of private equity firm Carlyle Group , said on Friday it had received substantial additional margin calls and additional default notices from its lender which could deplete its liquidity. It is believed they are overly exposed in the credit derivative market and particularly to Fannie Mae and Freddie Mac. The ‘Sage of Omaha’ was prescient when he warned of the proliferation of trillions of dollars worth of derivatives as "financial weapons of mass destruction." The President of the Federal Reserve Bank of New York, Timothy Geithner, said that some banks had moved from being too willing to take on risks to being reluctant to take any chance of losing money, a move that was making the crisis worse. FX Commentary With investors and traders alike shunning risk in favour of the tangibility of commodities and the security of not being long the dollar, FX market volatility abounds. Carry trades are being unwound apace with the Japanese yen and the Swiss franc being the main beneficiaries with the yen rallying against the dollar to levels not seen since the end of 2004. The main story though is the persistent dollar weakness. The greenback is falling daily to record lows against the euro and while the ECB are concerned about the absolute level they have one eye firmly fixed on inflation and as a result will be handcuffed from using monetary policy to relieve the pressure on the single currency. The Fed on the other hand appear to be letting the dollar fall on the sword in order to stave off a recession. These two factors will surely see the dollar continue to fall and fall hard. As the legendary Commodities Investor, Jim Rogers said recently with respect to the fall in the dollar; “You ain’t seen nothing yet!” While commodities are marginally off their recent highs, commodity currencies are still performing well. The Australian, New Zealand and Canadian dollars still remain at their elevated levels against the U.S. dollar, however sentiment toward the South African rand remains very negative as it hovers around the 8.0000 level against the Greenback. Support and Resistance Short term support is now at $950 below that at $930 and $915. Strong support in gold is now seen at $890 to $900. The $1000 price level remains a realistic short term price target and $1,200 remains a realistic possibility in the coming weeks. Silver Silver is trading at $20.80/20.84 at 1200GMT. Another clear indication that silver is far from a speculative mania rather in the early to middle stages of a secular bull market was seen in the fact that silver had its largest daily gain on a closing basis in memory and yet despite this the open interest actually fell. Again showing that speculative longs have not entered the market rather it is speculative shorts that have been exiting their humongous short position which is causing the price to surge. PGMs Platinum is trading at $2225/2235 (1200GMT). Palladium is trading at $547/553 per ounce (1200GMT). Platinum and palladium succumbed to profit taking after their recent sharp run up. A likely brief respite regarding the power supply issues in South Africa contributed to the PGMs sell off. Further weakness and some follow through selling may be seen but the fundamentals remain sound especially in platinum with large supply demand deficits predicted for this year.

Mark O'Byrne

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