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"DUE TO TRAVEL SCHEDULES, NO AFTERNOON COMMENTARY WILL BE POSTED. THANK YOU FOR YOUR UNDERSTANDING."
Good Morning,
Following yet another dramatic trading day, a fragile calm descended upon battered global markets overnight. The dollar and the yen eased a bit, while crude oil prices regained some lost ground and climbed from sub-$88 levels back to just above $91 a barrel. However, occasional local flare-ups (such as Iceland's nationalization of its second-largest bank) continued to raise concerns about more hotspots to be found in this seemingly inextinguishable global financial blaze. To properly frame the current upside-down state of the markets, consider that Iceland may get a $5 billion financial helping hand from...Russia. Hello, neighbor.
Gold prices widened their trading range ($860 to $890 overnight) but the bias favored advances to higher ground, as safe-haven buying received further participants from among anxiety-ridden global investors. Such apprehensions were not helped by news that Bank of America's profits fell 68%, that the Royal Bank of Scotland is in 'talks' with UK banks, and that Australia's central bank cut interest rate a full percent. Expectations of a globally coordinated round of interest rate easing are growing, while central banks are trying to deal with local issues in all kinds of creative ways. Like that whereby the Fed might start getting into the business of unsecured lending and fund cash-strapped firms.
As the going got tougher, gold got going. The metal once again faces a good opportunity to make an assault on the $900 to $925 range - a feat that has run into a few snags of late. The recently observed downside bias might dissipate further, should collective interest rate cuts reduce curtail a portion of the global flight to cash and divert additional funds into bullion. New York spot dealings opened the session with a solid $20 gain, quoted at $875.00 per ounce - roughly in the middle of the overnight range.
Participants are monitoring the outcome of a French proposal for an ad-hoc G8 strategy meeting, while keeping an eye on a number of local liquidity injections (India, Australia among them) that would put a vaccination clinic to shame. Silver rose 51 cents to $11.54 while platinum gained $36 to climb just above the millennium mark again. Palladium closed in on the $200 level with a $4 gain. Small gains were seen in Dow futures and the day started on as uncertain a footing as we have become accustomed to, of late. Part of this pattern, of course, is related to the manner in which traders and investors have turned into 'microwave' cooks - expecting instant results from every official action that has been placed into motion of late. There is no patience visible among them as yet. Irwin Kellner of Marketwatch observes that:
"Monday's stock market sell off largely reflected concern that the rescue package passed by the Congress and signed into law late last week will not unclog the financial markets anytime soon. Small wonder that investors are impatient, after all, this is the age of the Internet, text messaging and other forms of instant communication -- not just in the United States, but worldwide as well. Simply put -- these days the markets want instant gratification.
Like it or not, investors will have to live with the fact that, although the rescue package is now law, it will take time before its effects will percolate to the financial markets -- not to say the economy. This is because a number of steps have to be taken before the first distressed asset comes off the books of any lending institution. To expedite the process, the Treasury on Monday issued interim rules on the hiring of money managers and conflicts of interest. Before this, however, it must put together a small staff to oversee management of the plan as well as the hiring process.
Afterward comes the hiring of the investment management firms to run the reverse auctions needed to price these securities, so the government knows how much to offer. Figuring out which assets the government should buy and how long to hold them round out the process.
All this takes time -- weeks not days, to be sure. Once this process is completed, we should see the first effects: confidence restored between the banks. Such confidence is the sine qua non for credit to flow freely once again. And only after the banks have regained confidence in each other can business and consumers hope to obtain credit as well. For those who are still impatient, here's how to tell if the plan is working.
First look for the stock market -- that real-time indicator of investors' feelings -- to rise for more than just a day.
Then check the actual federal funds rate compared with the Federal Reserve's intended rate. Normally they are the same, but lately, the actual rate has been as much as four points above the Fed's 2% target, reflecting a reluctance of the banks to lend to one another.
The same goes for the London Interbank Offered Rate, or LIBOR. Lately it too has been way above the federal funds rate. Once things settle down, it should revert to its normal spread of about a quarter of a point.
After inter-bank confidence returns, look for commercial paper outstanding to stop falling and begin to rise. This would be a sign of confidence returning to the business sector, as money market funds and others resume their purchases of this instrument; it will encourage the banks the resume lending to business as well.
Consumers will be the last to be able to obtain credit as this process plays itself out, although individuals presumably will have already benefited from higher stock prices and increased job availability as business once again opens its doors. But before you jump for joy, keep in mind that only those with the best credit scores, payment histories and documented incomes will be able to obtain credit. In the case of business, add a solid business plan as well.
And forget about mortgage loan-to-value ratios of 100% or more; they'll be well below this threshold, going forward.
Welcome to banking the way it used to be."
A good day to rally, provided profit-takers don't end up being too tempted or suffer from the above-mentioned need for speedy gratification.
Happy Climbing (but keep the safety rope tight).
Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal
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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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