Gold Investments Market Update – Never Catch a Falling Knife

Gold

Gold finished trading in New York yesterday at $917.00, down $10.70 and silver was down 10 cents to $17.30. Gold rose slightly in Asian trading before falling. It is down again in early trading in Europe.

Slightly lower oil prices after yesterday’s sharp falls are contributing to gold’s further correction.

Despite increasing financial and economic risk gold fell yesterday on further oil price falls and a sharp rally in the dollar which took it to a one month high against a basket of currencies. But financial risk has not abated and the condition of the very financial system itself remains very precarious. Yesterday seems to have been a short squeeze dead cat bounce.

Smart money remains risk averse and the wise old market adage to “never catch a falling knife” has never been more appropriate.

The collapse of the world trade talks in Geneva is another bearish factor confronting the already slowing global economy and has serious ramifications for both the developed and developing world economies.

Financial System Itself Is Broken

The market action yesterday was particularly counter intuitive as the Merrill Lynch write downs were horrendous and in normal circumstances would have resulted in falling equity markets and a falling dollar. But with free markets now being impinged upon by the U.S. Treasury, government and regulators anything can happen in the short term. The ever astute Nouriel Roubini, one of the few commentators to have predicted the scale of the current crisis wrote yesterday:

“If this is the way to run the finances of one of the largest broker dealers in the most advanced financial system in the world it is not wonder that this system is totally broken. The smart and very savvy Mohamed El-Erian (co-CEO of Pimco) put it in polite terms when he recently said while commenting on this financial crisis: “What has suffered most is the credibility of the most sophisticated financial systems in the world.” It is both the credibility and viability of the most sophisticated financial system that is at stake now as most of this financial and banking system is on its way to substantial and formal insolvency and bankruptcy.”

On a daily basis there is such a plethora of negative and bearish news that it is hard to keep pace with developments. And many of the developments, particularly the response of government, Treasury’s Paulson and regulators, will be seen as more short term “quick fix” attempted solutions which will actually make the crisis far worse in the medium to long term.

Short term, vested interest thinking and wishful thinking got us into this mess and more of the same will likely make the financial and economic crisis far worse. Ultimately, all the various mini crises will likely lead to a very severe monetary crisis and markets participants and investors would be wise to begin to hedge themselves against such a possibility.

Today’s Data and Influences

Traders will be closely watching this afternoon’s release of the ADP employment report for July, which should give some direction ahead of Friday’s official unemployment data. However, events on Wall Street will also be closely watched and sentiment remains fragile.

Gold and Silver

Gold is trading at $908.20/908.70 per ounce (1200 GMT).
Silver is trading at $17.12/17.16 per ounce (1200 GMT).

PGMs

Platinum is trading at $1738/1748 per ounce (1200 GMT).
Palladium is trading at $380/385 per ounce (1200 GMT).

Mark O'Byrne

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