Daily Market Update

Gold Investments Market Update – Alan Greenspan: “Gold still represents the ultimate form of payment in the world”

Gold

Gold finished trading in New York yesterday at $977.10, up $5.00 and silver was down to $18.92, down 27 cents. Gold fell in Asia before rising in early European trading.

Gold rallied strongly in early trading yesterday on higher oil, a lower dollar and increasing macroeconomic and systemic risk prior to the sharp fall in oil prices (some $10 in a short period of time) which led to a selloff in precious metals. Despite the sharp selloff in oil, gold again remained resilient and finished some 0.5% higher in New York. The sharp fall in the oil price was attributed to margin calls due to equity losses and to fears of demand destruction due to the slowing U.S. and international economies.

Gold was up some 7% in the previous 5 trading days (from below $920 to over $983) and a correction and consolidation is to be expected.

Oil and the dollar are unchanged so far today and the gold market may get direction from developments in the financial sphere and from increasing risk aversion.

Alan Greenspan: “Gold still represents the ultimate form of payment in the world” – From Credit Crunch to Solvency Crunch

Gold will likely continue to outperform all asset classes with solvency and systemic risk increasing.

During the Savings and Loan Crisis in late 1980s and early 1990s more than 1,000 federally insured institutions went bankrupt. The debacle, the greatest collapse of American financial institutions since the Depression, prompted a government bailout that cost taxpayers about $125 billion.

Today, the troubles are growing so rapidly that a similar number of the 7,500 banks nationwide could fail over the next 12 to 18 months. Other lenders are likely to shut branches or seek mergers.

Besides Indymac, Fannie Mae, Freddie Mac and Lehman Brothers there are increasing concerns regarding Wachovia, Bank of America, Washington Mutual , National City Corporation, Santander BanCorp and Flagstar Bancorp. Other financial institutions at risk of failing are Downey Financial, Corus Bankshares, Doral Financial, IndyMac Bancorp, FirstFed Financial, Oriental Financial Group and Bank United Financial. These banks may have fatal credit concerns that may lead to bankruptcy.

Today’s problems dwarf the relatively minor problems of the late 1980s which only cost the taxpayer some $125 billion and the bankruptcies were of smaller regional banks and did not affect Wall Street investment banks and Fannie Mae and Freddie Mac. Thus, systemic risk did not develop in the Savings and Loan Crisis.

Respected Bridgewater Associates recently published a study that estimated losses to financial institutions of more than $1.6 trillion dollars in the current crisis. This was prior to the news regarding Indymac and Fannie and Freddie. Fannie Mae and Freddie Mac own or guarantee more than half of the $12 trillion of U.S. home loans. Indymac, with $32 billion in assets is America’s second biggest bank failure ever. At least $3 trillion of inferior loans probably remain on Indymac books at present and the amount of inferior loans will grow as economic conditions continue to weaken.

This is now a credit and solvency crisis. As George Soros recently pointed out “Freddie Mac and Fannie Mae have a solvency crisis not a liquidity crisis. They are both “extremely leveraged” and “the deterioration in the housing market, the foreclosures are going to cause losses which exceed their equity” he said.

Gold is a safe haven asset and the only asset class that is not someone else’s liability and this is why it is thriving in the current environment and will likely reach it’s inflation adjusted high of $2,300 per ounce in the coming 3 to 5 years.

Gold is the only finite currency – as JP Morgan once testified to Congress, “Gold is money and nothing else”. Even more pertinently and more recently Alan Greenspan said “Gold still represents the ultimate form of payment in the world. . . . Fiat money, in extremis, is accepted by nobody. Gold is always accepted” (Speech to Senate Banking Committee in May 1999).

Gold remains the ultimate safe haven asset and all portfolios should have a minimum allocation of 10%. Given the extent of current macroeconomic and systemic risk, an increase in this allocation to at least 20% would be very prudent.

Today’s Data and Influences

Today sees the release of a number of important US indicators, including the June CPI, which may influence markets. Bernanke delivers his second testimony this afternoon. The minutes of the last FOMC meeting (24/25th June) are also scheduled.

Silver

Silver is trading at $18.90/18.94 per ounce (1200 GMT).

PGMs

Platinum is trading at $1947/1957 per ounce (1200 GMT).
Palladium is trading at $437/441 per ounce (1200 GMT).

Mark O'Byrne
Executive Director

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