Gold Still In Trading Rangey Joe Battaglia
Posted: March 24, 2009
Yesterday's announcement of the private/public partnership to purchase toxic assets from banks caused an enormous weight of enthusiasm among stock investors. Their buying late in the day (after the New York Gold Market closed) drove the Dow up 500 points. In the after-market gold began to react to that, but in the overnight markets it sold off heavily dropping as low as $916.90 on the futures contract before rebounding to $921.90, down $30. Silver fell as low as $13.32 before rebounding, but is still down $.50 on the day. This leaves gold confined to the trading range that it has been in for the past couple of months trading between $880 and $950. However, the momentum for the market is higher. Technical analysts believe this market is going to break out to the upside. In addition, in the last couple of days UBS Bank raised it's forecast for gold to $1,050 within a month and $1,100 within three months.
Gold came off after the bank announcement simply because the demand for safe haven assets was reduced. Normally, one would think that would also impact the dollar. However, the dollar was down roughly 50 basis points yesterday, and it is up about the same this morning. This means it was neutral for the dollar. Equities are lower today, but the correction of 50 points in early trading isn't very much. Oil is also lower, putting some pressure on the metals markets, down $1.15 at $52.65 a barrel.
Analysts are observing that for the moment silver seems to be more resilient than gold and the gold to silver ratio is narrowing. Analysts conclude that this is primarily due to the industrial usage of silver, which would increase in an expanding economy.
If we look at the actual details of the so called "Toxic Asset Bailout Plan" what we see is further printing of money out of thin air and massive inflationary policies that will be very difficult to contain once the economy begins to turn. In this program, the government is putting up virtually all the money and will take all the losses, while sharing in only 50% of the profits. Treasury Secretary Geithner specifically exempted the banks that participate in this program from the restrictions on paying bonuses. Moreover, those who participate to purchase these toxic assets will be managing the program and entitled to collect management fees, which typically run about 2% per year. That means for the 3% in cash that is put up by the private entities (most of which will be borrowed or obtained from individual investors) the private entity gets half the profits plus management fees which means they put no money up whatsoever. There is no recourse if there are losses. Consequently, the government will take 97% of the losses for only 50% of the gain. This is a crazy program that in my opinion will do little to alter the fundamental problems that exist with regard to these underwater credit derivatives.
AIG announced that it has credit derivatives on its books that need to be managed and liquidated in excess of $1.5 trillion. The total amount of these credit derivatives that exist among the major banks may be $30 trillion. Will this program work to resolve these issues without liquidating those obligations? Only time will tell.
Within the next two weeks they will also alter the mark-to-market rules, which will further help these major banks. However, the situation looks very similar to what they did in Japan, which remained in a depression for over 20 years because of similar bank problems.
Going back to gold, J.B. Weir of Goldman Sachs said that gold held up well in light of gains of 6.8% in the Dow. He said the impact was muted because the longer-term growth/inflationary risks continue to attract investment flows into gold. The Dow Jones Wire Service analyst themselves also indicated that gold continues to look bullish in these markets. They said: "Spot gold now at $942/oz, has rare bullish cross on charts with 100-day moving average now above 200-day moving average, says Dow Jones commentary analyst Mark Cranfield. Last time these averages crossed in February 2007, gold was around $660 – then rallied above $800 in the same year, before peaking out at $1,030 in March 2008. If gold keeps its safe haven status with investors, alive with bullish chart signals, another run at $1,000 is on the cards for coming weeks with medium term target at $2,000 at peak." UBS Bank's analysts also see gold higher along with those from Merrill Lynch.