gold is holding nicelyby Joe Battaglia
Posted: March 23, 2009
Gold was down over $8 in pre-market trading, but bounced back up shortly after the open. In the first half-hour of trading gold is $5 lower while silver is down $.14. The dollar is down 3 basis points at 83.82 and oil is up $.13 at $52.50. The Dow is responding to the new Toxic Asset Bailout Program by rising 150 points to 7,425 in the first half-hour of trading. What we have really seen in the precious metals is a modest decline in risk aversion or a modest increase in risk appetite according to Jim Steele, Senior Vice-President and Metals Analyst with HSBC Bank.
Much remains to be seen about the effectiveness of the Toxic Asset Bailout program and the willingness of the banks to participate in it. Under the proposal the treasury will use $100 billion worth of TARP funds (it doesn't have) to borrow $1 trillion from the Fed (which it doesn't have) and inject that money into the financial system by buying up these toxic assets in a private/public partnership. Government guarantees will protect the private entities from significant losses. The most they can lose is their 3% down payment. The government takes 97% of losses. This is a program that has been discussed at some length over the past several weeks, but whether it will be effective in alleviating the problems remains to be seen.
In the next week or two, they will also announce some modifications to the mark-to-market rule, which will enable banks to keep these assets on their balance sheets without resorting to the government bailout programs. Even if this works to alleviate some of the toxic debt on the banks balance sheets, it still leaves them with a huge amount of undisclosed liabilities with regard to other kinds of derivatives including credit default swaps.
At this point, gold is holding nicely. It would be a good sign if gold could hold at the $950 level. The combination of the Fed's quantitative easing or printing of money, along with the latest bailout program which involves still more printing of money, should be the kind of situation that would drive gold up on the basis of future inflation expectations. Remember, the Federal government does not have the $100 billion that it is posting as collateral to borrow $1 trillion from the Fed, which does not have that money either. All of this money is being created out of thin air. That is a troublesome issue that is being conveniently overlooked by those on Wall Street. The net loser in this is going to be the U.S. dollar, which in time will be dragged too much lower levels.
In addition, do not overlook the fact that many countries are calling for the abandonment of the U.S. dollar as the world's reserve currency. As the world begins to move towards a new global or world currency, things will change dramatically in the U.S. The ability to finance all of this debt is going to be greatly diminished. Therefore, the government will be forced to simply create this money out of thin air, which will in turn diminish the value of buying power of all existing forms of money