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What Are ECB Actions and Utility Stocks Saying About Gold?

Commodities / Gold and Silver 2011 Dec 22, 2011 - 05:33 AM GMT

By: Eric_McWhinnie

Commodities

Despite calls for the death of the gold bull market, the precious metal managed to climb $21 higher on Tuesday to settle above the $1,600 psychological level. The U.S. dollar declined as the euro sustained a move above $1.30. While many expect today’s European Central Bank loan offering to add some form of stability to the euro zone, investors are still remaining cautious.


The ECB provided 489 billion euros in three-year loans today, the most ever in a single operation, signaling that hundreds of banks foresee the need to hoard cash for a troubling 2012. The ECB said 523 banks asked for the 489 billion euros in funds, which will be lent at the average of its benchmark interest rate — currently 1 percent — over the 1,134-day loan period. The ECB move adds another fundamental reason to hold gold, as it injects more money into the markets, but does not solve the remaining solvency crisis.

Barclays estimates that today’s operation will inject 193 billion euros of new money into the system, with 296 billion euros accounted for by maturing loans. The loans amount to quantitative easing “through the backdoor,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. “What the ECB is doing is providing ultra-cheap money to banks, which in turn are going to be in there buying the sovereign debt up,” Derrick told Bloomberg Television’s “First Look” earlier today.

Although gold dipped to nearly $1,560 last week, many investors viewed the decline as another buying opportunity, because nothing in the financial landscape has changed. There are actually more uncertainties than ever before. The MF Global fiasco has reminded investors that financial markets are still extremely fragile. In addition to the $1.2 billion that has mysteriously vanished into thin air, customers are feeling even more pain from America’s eight largest bankruptcy in history. Barron’s reported earlier this week, “The trustee overseeing the liquidation of the failed brokerage has proposed dumping all remaining customer assets—gold, silver, cash, options, futures and commodities—into a single pool that would pay customers only 72 percent of the value of their holdings. In other words, while traders already may have paid the full price for delivery of specific bars of gold or silver—and hold “warehouse receipts” to prove it—they’ll have to forfeit 28 percent of the value.” To add insult to injury, traders are still being charged storage fees for commodities.

Despite the Dow Jones Industrial Average hitting 12,000 again, investors may not be as bullish as the index shows. On Tuesday, several utility companies such as Xcel Energy and Duke Energy hit fresh 52-week highs, while Southern Company and Consolidated Edison reach new all-time highs. Utility stocks are generally classified as defensive investments that cushion against volatility and downturns in the economy. Even in dismal economic times, people need to heat and light their households. On the other side of the spectrum, financial giant Bank of America recently traded below $5 per share, its lowest since March 2009. As the financial markets around the globe continue to deteriorate and send investors running towards defensive stocks, central banks around the world will face increasing pressure to offer even more quantitative easing. Such a move will add more fuel to gold’s 11-year bull market.

For more analysis on our support levels and ranges for gold and silver, consider a free 14-day trial to our acclaimed Gold & Silver Investment Newsletter.

By Eric_McWhinnie

http://wallstcheatsheet.com

Wall St. Cheat Sheet : Only days after the S&P 500 crashed to the depths of hell at 666, the Hoffman brothers launched Wall St. Cheat Sheet: one of the fastest growing financial media sites on the web. Like a samurai, our mission is to cut through the bull and bear shit with extraordinary insights, a fresh voice, and razor-sharp wit. We provide the highest quality education and information for active investors, financial professionals, and entrepreneurs.

© 2011 Copyright Eric McWhinnie - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors


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