Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold Rises as Central Bank "Crisis Action" Fails to Ease Money-Market Fears

Commodities / Gold & Silver Mar 12, 2008 - 12:03 PM GMT

By: Adrian_Ash

Commodities SPOT GOLD PRICES rose out of a tight 1% range as the US opening drew near on Wednesday, while global stock markets continued to bounce after four months of losses in response to yesterday's historic "crisis action" from seven of the world's biggest central banks.

Short-term Dollar lending pressures eased in London , but the cost of borrowing Euros continued to rise. The US currency fell towards a new record low vs. the Euro at $1.5490.


US crude oil prices held just below $109 per barrel.

"Any perceived improvement in US economic fortunes [thanks to Tuesday's action] should support the Dollar and therefore weigh on Gold ," reckons James Steel at HSBC in New York .

"It calms financial markets and boosts equities, reducing the need to purchase bullion as a safe haven."

Yet despite the central-bank action, however, "all metals appear to be well bid this morning," says today's note from Mitsui, the precious metals dealer.

Gold Bullion owned with no counterparty risk has risen by more than 47% since the global banking crisis began in August last year, and while "a short term consolidation [in Gold ] does look possible," says Mitsui, "the bullish fundamentals should push things higher again soon."

On Tuesday morning the US Federal Reserve – acting in concert with the central banks of Europe , Japan , the UK , Canada , Switzerland and Sweden – offered to lend New York dealers a total of $200 billion in government bonds for up to 28 days at a time.

The aim was to ease short-term interbank interest rates, which recently neared fresh seven-year highs and sparked a rash of hedge-fund failures and investment bank losses despite coordinated central-bank action in mid-December.

In return for the extra $200bn in short-term funds, the Fed will now take higher-risk assets as collateral, accepting mortgage-backed bonds (MBS) that are not insured by government agencies Freddie Mac or Fannie Mae.

But the Fed's action "takes the US central bank a step closer to the nuclear option of buying mortgage securities in its own right," says the Financial Times today, because the Fed is effectively creating a market for mortgage-backed bonds in the absence of any free-market trading.

It also echoes the European Central Bank's action during the last three months of 2007, when it accepted all $80 billion of new mortgage-backed bonds issued by Spanish banks as collateral against short-term loans because the open market "shut down" in the words of one bank trader.

Early Wednesday, open-market Dollar lending rates in London showed short-term pressures easing, with the gap between three-month Dollar swaps and three-month interbank Dollar lending rates narrowing to 0.65%, down from last week's 0.80% spread.

That gap hit 0.95% when the UK 's Northern Rock mortgage bank collapsed in Sept., and it peaked again at 1.05% just before the first joint-central bank action in December according to Reuters data.

But interbank rates charged on Euro loans continued to rise this morning for the seventh day running, taking three-month Euribor prices to 4.61% – the highest rate since Jan. 7th.

What's more, the AAA-rated bonds the Fed will now accept as collateral for its 28-day loans are not be safe "investment grade" assets they first appear, according to Bloomberg.

"Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut [their credit ratings on] the ones that matter most," says the newswire today – "AAA securities that are the mainstays of bank and insurance company investments."

One mortgage-backed bond floated by Deutsche Bank in May 2006, for example, is still rated "triple-A" by both S&P and Moody's. Yet 43% of the mortgages underpinning it are now delinquent.

( How was this mountain of Toxic Waste ever created and sold? Find out if your pension or mutual fund is merely Investment Landfill here... )

"The Fed is basically accepting busted securities as collateral for loans," says Ian Shepherd, senior economist at High Frequency Economics in London . "I don't ever remember central banks co-ordinating globally like this. It should scare the hell out of everybody."

Within the US banking system, more than one third of America 's smallest banks now have commercial real estate concentrations exceeding 300% of their capital, according to their regulator, the Comptroller of the Currency, John Dugan. Nearly 30% of these "community banks" have construction and development loans exceeding 100% of their capital.

As for the broader US stock market, "between the close of business Thursday and Tuesday, the Fed's extra $352 billion in liquidity enhancing measures bought a 1.3% increase in the S&P500," says Sean Corrigan at Diapason Commodity Management in a private note to BullionVault today.

"Since we need a 19.4% rally to regain the Suckers' High of 1576 in October, we might need another $4.8 trillion in new measures to do the trick. Neatly, that would equate to the Fed buying out the outstanding total of Agency/Government-backed mortgage pools, with enough room to nationalize Freddie and Fannie at current market value, into the bargain.

"Over to you Ben..."

Asian stock markets took their lead today from yesterday's 4% surge on Wall Street, rising everywhere but China and closing the session 0.9% higher on average.

Here in London , the FTSE index of 100 blue chips added 114 points to Tuesday's 61-point gain, taking it back towards last Thursday's closing price.

Government bond prices meantime slipped further in Tokyo , Frankfurt and London . US Treasuries rose, however, pushing the returns offered by two-year bonds seven basis-points lower from Tuesday's 12-year record jump to 1.78%.

"Money-market stresses seem to remain high," says Laurence Mutkin, head of European fixed-income strategy for Morgan Stanley in London . "Credit and counterparty concerns are not being removed by central bank actions."

Outside the hedge funds and investment banks loaded with failed mortgage-backed bonds, "a surge in the default rate is imminent and almost unavoidable" for European corporate debt says a new report from strategists at Dresdner Kleinwort.

Almost 40% of Europe's business debt will need re-financing within the next 12 months, says the report, and these "rapidly accelerating borrowing needs may cause supply fears, or cause a shortage of available funding, especially when liquidity is already tight."

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
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 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in