Gold and silver rallied Friday as the crisis on Wall Street deepened with gold up $17.80 to $759.80 and silver up 21 cents to $10.74. The rally continued in Asia overnight when gold surged more than $20 to over $785 before gradually giving up those gains in early trading in London. Gold’s gains in Asia have been eroded as oil prices have fallen sharply (some 4%) and in extremely volatile trading the dollar has recovered sharply from steep overnight lows ( dollar has rallied 1.6% from 1.4478 to the euro to trade back up to 1.4250).
With equity and currency markets in turmoil, talk is growing as to what the Fed will do at tomorrow’s meeting to help cope with the fallout. Markets will be looking to see if the central bank reinforces the recent change in expectations that the next move in US rates could be a cut instead of the near term increases that traders had been predicting up until very recently. These recent developments have caused the market to now price in a 50% chance of a 25 basis point interest rate cut by the Federal Reserve tomorrow. This will see the dollar come under pressure again and is bullish for gold.
Gold’s safe haven credentials are set to come into their own again as the global financial and capitalist system itself is creaking at the seams. It is arguable that systemic risk has never been as high as this (even during the Great Depression) and unfortunately conditions are set to get markedly worse before they get better.
Financial contagion is spreading throughout the financial system and most worryingly, it is now spreading from Wall street to main street.
Besides Lehman Brothers filing for bankruptcy, there are increasing worries regarding the solvency of Merrill Lynch, Washington Mutual, Citigroup and Wachovia Corporation. Not to mention many airlines and the huge U.S. automakers who are also at risk of bankruptcy.
With credit tightening, gas prices surging and house prices crashing, first-half auto sales in the United States plunged to the lowest level in a decade-and-a-half. The result has pushed U.S. automakers, led by General Motors Corp to the brink, raising questions about their ability to ride out the downturn and raising talk of $25 to $50 billion bailouts. Although the industry understandably prefers to call them low interest development loans.
In one of the most radical reshapings in Wall Street history the Federal Reserve is to again make it far easier for financial institutions to access Fed liquidity by easing terms on its borrowing facilities and accepting a much wider range of assets as collateral – this incredibly may even include equities. Federal government debt is surging and at risk of going exponential. This has huge ramifications and is extremely bearish for U.S. debt markets, U.S. treasuries and the U.S. dollar.
The deteriorating situation in the world’s largest insurer is extremely concerning and possibly a more serious development to the insolvency issues on Wall Street. As one of the largest reinsurers in the world, its failure could lead to a cascading waterfall effect with serious ramifications for businesses and corporations around the world. A credit crisis followed by an “insurance crisis” where businesses internationally cannot insure themselves against risk is the last thing the global economy could handle right now.
In the light of the continuing deterioration of the financial system and the increasing risk of contagion in the financial system and the wider global economy, gold remains very undervalued and will continue to outperform other asset classes in the coming weeks, months and years.
Gold and Silver
Gold is trading at $773.90/774.50 per ounce (1115 GMT).
Silver is trading at $10.84/10.91 per ounce (1115 GMT).
Platinum is trading at $1156/1166 per ounce (1115 GMT).
Palladium is trading at $233/236 per ounce (1115 GMT).