Gold Bubble Brewing as Washington Funds Mortgage Bond Rescue Worth $1 Trillion
Commodities / Gold & Silver 2009 Mar 23, 2009 - 09:17 AM GMTBy: Adrian_Ash
THE SPOT PRICE of physical gold moved in a 1% range against all major currencies Monday morning, bouncing off a low of $946 an ounce as the Dollar rose vs. the Euro and Wall Street stocks jumped on a new rescue plan for US banks.
Announcing its new "Public Private Partnership Investment Program" – and aiming to remove $1 trillion of toxic investments from US bank balance sheets – the Treasury said it will split the purchase of what it calls "legacy assets" with hedge funds and other leveraged speculators.
Requiring a down-payment of as little as 7.2% of the agreed price, the scheme will then see bank-regulator the Federal Deposit Insurance Corporation (FDIC) guarantee the buyer's repayments to the bank of the outstanding debt.
"Recent bubbles in stocks, housing and commodities have been driven by easy credit," writes Martin Hutchinson of Prudent Bear at the Daily Telegraph today, and "a gold bubble driven by inflationary concerns may [now] be inevitable."
"This plan will stay in the limelight this week," says the latest Gold Investment note from London dealers Mitsui, "and as such the pressure on the US Dollar should remain, lending some traditional support to Dollar-based commodities.
"Gold has short term support at $945."
"As more central banks embark on quantitative easing, they are systematically debasing their currencies ," agrees Steven Barrow at Standard Bank this morning.
"The Dollar, Pound and Swiss Franc should all decline against currencies where quantitative easing is unlikely. For the moment, this includes the Euro, although we believe that the European Central Bank will have to join the quantitative easing club before long."
Last Wednesday – on news of the US Fed creating $1.25 trillion in new money – the trade-weighted Dollar Index recorded its sharpest one-day drop in nearly four decades.
"This is a historic moment – the start of debasement of the world's reserve currency," says Alan Ruskin, head at RBS Greenwich of international forex strategy, to Bloomberg today. "In the grand sweep of history we are witnessing the end of Rome on the Potomac."
Looking ahead for the Euro, however, Germany's RWI consultancy today forecast a drop of 4.3% in the continent's largest economy for 2009, more than double its Dec. forecast of a 2.0% contraction.
"The ECB needs to wake up to reality," says another currency strategist quoted by Bloomberg today. "European policy makers are behind the curve," says a third.
Looking at the emerging world economies, "Bluntly the situation is dire," warned Dominique Strauss-Kahn – managing director of the International Monetary Fund (IMF) – at the International Labor Organization today in Geneva, Switzerland.
Telling the United Nations' agency that developing states risk a breakdown in the rule of law thanks to the global financial crisis, "All this will affect dramatically unemployment," Strauss-Kahn explained.
"Beyond unemployment, for many countries, it will be at the roots of social unrest, some threat to democracy, and may be for some cases it can also end in war."
Across in Tokyo today, top Japanese retail Gold Investment provider Tanaka Kikinzoku told Bloomberg that fast-growing interest in the metal has "stood out" amongst customers aged 20 to 40.
"A slow-and-steady approach to investing is in line with the values of Japanese young people, who emphasize stability in their lives," reckons Koichiro Kamei, head of Market Strategy Institute Inc. in Tokyo.
Tanaka Kikinzoku says its client-base has widened from 60,000 to 350,000 in the last 12 months. Nearly 40% of its customers are in their twenties and thirties, executive Noriyuki Abe tells Bloomberg.
"Where John Paulson goes, others are likely to follow," says Reuters today, after the legendary hedge-fund manager – who reputedly grew his Credit Opportunities Fund six-fold betting against sub-prime US mortgages in 2007 – took an 11% stake in world No.4 Gold Miner, AngloGold Ashanti last week.
"If gold is rising in value, then it's likely that everything else is struggling. And if John Paulson thinks the crisis still has some way to run, there's a good chance it does."
In the Gold Futures & options market, meantime, new data show open interest in betting on the direction of Gold Prices swelling nearly 2% to a four-week high above 531,000 in the week to last Tuesday – one day before the Fed's dramatic " Quantitative Easing ".
Hedge funds and other large speculative players trimmed their "short" bets against the Gold Price , but kept their "long" bullish bets steady. That pushed the bullish ratio in their speculative positions back above 90% for the first time in five weeks.
A sharp jump came in bullish bets owned by the commercial traders – often referred to as the "smart money" – who act for "trade" firms such as refineries, wholesalers, and bullion banks.
By Adrian Ash
BullionVault.com
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City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2009
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