Daily Market Update

Gold Investments Market Update – Trillion Dollar Bailouts Will Likely Cripple U.S. Budget and Imperil the Dollar

Gold

Gold finished trading in New York on Friday at $959.10, up $18.90 and silver was up to $18.72, up 48 cents. Gold rose in trading in Asia before selling off in early European trading on profit taking due to falling oil prices and a rising dollar this morning.

Both gold and silver were up nearly 3% last week on inflation hedging and safe haven buying and profit taking is to be expected. Gold and silver were up nearly 3% for the week and yet the dollar was only down some 1% and oil was essentially flat after a very volatile week. Thus, gold and silver are beginning to outperform oil as predicted and this can clearly be seen in the monthly performance in the performance table. This is especially the case due the severity of the current financial market meltdown. Systemic risk is real and growing and the very U.S. financial system itself is now at risk of collapse and this has ramifications for the global financial and monetary system.

Despite constant reassurances by many on Wall Street, by vested interests in the financial services community internationally and by government officials that the worst of the credit crisis was over, the credit crisis has deteriorated as graphically illustrated with Fannie Mae and Freddie Mac and with the collapse of Indymac Corporation, the second largest bank failure in U.S. history. Unfortunately, the credit crisis remains in its early stages and after one year we are still near the beginning of this crisis rather than the end. The subprime crisis will now be followed by the alt-A and prime mortgage crisis, the car loan crisis and even more serious will be the credit card crisis.

All these mini crises will likely lead to a dollar crisis and a global monetary crisis and could lead to a serious and prolonged recession and there is even now the possibility of an inflationary depression in the U.S.

Trillion Dollar Bailouts Will Likely Cripple U.S. Budget and Imperil the Dollar

Fannie Mae and Freddie Mac’s rapid slide into the centre of the global financial crisis has Wall Street frantically talking about a possible government takeover of the government-sponsored mortgage agencies. The situation is so dire that according to a report in the New York Times, senior Bush administration officials are considering a full-on government takeover or nationalisation.

There is a real risk that a bailout of the GSEs would be so costly that it would cripple the U.S. budget and threaten an already badly bruised U.S. currency.

Of importance on Friday was the fact that the safe haven bid was into gold and not into government bonds and U.S. treasuries. Rather the dollar sold off aggressively as did U.S. bonds and treasuries .

The U.S. dollar has fallen sharply in recent years and its safe haven status is now already in jeopardy. Should the U.S.’ already reluctant creditors in China, Japan, Russia and the Middle East balk at buying U.S. debt than there could be a fall in bond prices, sharply higher interest rates, a run on the dollar and an unprecedented dollar crisis.

On Friday the dollar neared record lows versus the euro and gold surged in value. A sharp fall in U.S. stocks sent the euro to an 11-week high of $1.5970 over the weekend, less than a cent away its record peak of $1.6020 seen on April 22.

The U.S. government cannot bail out the entire financial system. The FDIC deposit fund only has $53 billion of assets and yet more realistic appraisals of coming global writedowns and losses from the credit crisis are of some US$1.3 trillion. Fannie Mae and Freddie Mac are holding or ‘guaranteeing’ about $5 trillion worth of mortgages. Any attempt to bailout the financial system would involve money printing and money creation on a scale of that of the Weimar Republic – which led to the brutal hyperinflation seen in Germany in the early 1920s.

Today’s Data and Influences

Today is relatively quiet on the U.S. data front, with market participants looking for further news from the financial sector and moves in equity markets to give direction to the precious metals again.

Key events to watch this week are producer prices and consumer prices for June, as well as the retail sales report for the same month. More significant may be Fed Chairman Bernanke’s testimony to Congress on Tuesday and Wednesday in which he will discuss the current financial crisis.

Silver

Silver is trading at $18.78/18.82 per ounce (1145 GMT).

PGMs

Platinum is trading at $2007/2012 per ounce (1145 GMT).
Palladium is trading at $447/451 per ounce (1145 GMT).

Mark O'Byrne
Executive Director

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