Gold Investments Market Update

Gold
Gold was up $16.50 to $934.80 per ounce in trading in New York yesterday while silver was up 70 cents to $17.70 per ounce (see more on silver shortages below). Gold has rallied in Asian trading and again in trading in London this morning. The London AM Gold Fix at 1030 GMT was at $945.75 £473.68 and €602.01 (from $930.65, £467.24 and €598.57 yesterday).

With the credit crisis deepening, the dollar again showing weakness and oil prices well bid in the low $100s, gold is showing strength again this morning.

The economic data yesterday was dismal with house prices falling in January to a record low (down a significant 10.7% from January 2007). Not surprisingly falling house prices and the reversal of the “wealth effect” helped contribute to March’s consumer confidence plummeting to lowest levels since the stagflation of the early 1970s. Record gasoline prices and growing inflation will not have helped the mood of the U.S. consumer. Of importance was the fact that the expectations component of the index fell to a new low, the lowest since 1974, and this must raise alarm bells regarding the health of the U.S. consumer – the primary driver of the U.S. economy.

More U.S. housing market data in the form of new home sales and durable goods orders are due today and further poor data will likely lead to safe haven demand for, and investors continuing to diversify into, gold.

Further evidence that the credit crisis is not abating and is indeed worsening is evident by the fact that banks are continuing to hoard cash and borrowing costs between institutions continues to rise. Britain’s interbank borrowing market has begun to seize up again. Three-month LIBOR rates rose yesterday for the 11th session in a row to 5.995 percent.

Unfortunately, despite the increasingly futile efforts of central banks and the Federal Reserve to ease the financial crisis it continues to deteriorate. It seems increasingly likely that the credit crisis may soon degenerate into a solvency crisis and the very solvency of the U.S. financial system is at stake. The worry is that the shadow banking system with its $516 Trillion of exotic and untested derivatives or “Buffett’s financial weapons of mass destruction” may lead to what is being called a ‘Derivatives Chernobyl’ as outlined by Ambrose Evans Pritchard in the Telegraph (http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/23/ccfed123.xml)

The toxic mix of stagflation and a growing solvency and systemic crisis means that risk aversion should remain paramount for investors. Gold and silver should be a cornerstone of all portfolios in the current unprecedented macroeconomic climate. Cash is not a safe haven in an economic environment threatened by systemic risk and significant inflationary risk.

Support and Resistance
Gold’s support is now between $900 and $906 and below that strong support is at previous resistance at the 1980 record nominal high of $860. Resistance is at the recent new record nominal high of $1030.80 and $1000. Gold Investments continue to see gold reaching at least $1,200 per ounce in 2008.

Silver
Silver is trading at $18.00/18.05 at 1200GMT.
Gold Investments continue to see silver reaching $25 per ounce in 2008 especially in the light of the incredibly and unprecedented supply demand imbalance in silver.

All the above ground refined silver in the world is only worth at today’s prices roughly a miniscule $9 billion (500 million ounces X $18).

Roughly what the Federal Reserve is printing on a daily basis in order to rescue the world’s financial system. Any one of hundreds of billionaires, hedge funds or sovereign wealth funds could decide to take a significant position in silver or even corner the silver market as the Hunt brothers did in 1979-1980. Such an action which appears increasingly likely would result in a surge in the price of silver that would make that seen in the 1970s very tame in comparison. This would especially be the case if those cornering the silver market did not make the same mistake as the Hunt brothers. They failed to take delivery of their silver bullion and amassed a huge stake in the leveraged futures marketplace. Outright ownership of physical bullion by buying ‘off exchange’ and taking delivery of all silver on expiration of futures would eliminate this risk.

There is further confirmation of shortages of refined silver coin and bar products in the U.S. bullion marketplace. Not only are 1 ounce and 10 ounce silver bars not available in many wholesalers and large dealers but there are also issues with regard to silver eagles and silver maples with the mints being out of stock and with there being delays of some 3 to 4 weeks prior to delivery.

PGMs
Platinum is trading at $1985/1990 (1200GMT).
Palladium is trading at $456/460 per ounce (1200GMT).

Mark O'Byrne

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