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A Little Money (That's What I Want)
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Good Afternoon,
A day mild of profit-taking but plenty of leftover apprehension followed the supernova explosion in oil prices and strong surge in gold that we saw on Monday. Commodity markets became fretful about the possibility diminished funds being available in the future for participants to play with, as well as about the looming specter of commodity market regulation as US legislators catch flak from a broad range of constituents. Obviously, the disappearance of Wall Street as we knew it has ushered in a new era - one that will inevitably affect every market niche, and that includes commodities. Barely one week after this new paradigm came into being, speculators and investors find it difficult to apply old rules and expect the same outcomes. And, yes, they are still confused as to where the next shoe to drop might come from.
Analysts have pointed out the fact that the dollar is not necessarily doomed and headed for extinction as a result of the de facto nationalization of Wall Street. Similar rescues in past years failed to bring about the demise of the yen, the Norwegian krone, as well as the greenback itself following the S&L debacle. Actually, such bailouts turned out to be the troughs from which the currencies eventually rose. Current perceptions are that the dollar will suffer only during this initial nebulous stage and only to the extent that the US government ends up losing money on the eventual sale of the assets it adopts from the financial system. That said, the current turmoil might end up knocking the greenback one rung lower still, on the global reserve currency ladder.
New York spot dealings had gold in orbit mainly around $890 but also dipping as low as $881 intra-day. Many players chose to watch the hearings on Capitol Hill in order to get a sense of direction for the dollar and equities. With one hour to go before closing out the afternoon session, gold prices returned to higher ground, losing only $2.50 at $896.00 per ounce. Silver was down 21 cents at $13.26 while platinum dropped $41 to $1196 and palladium was last seen at $247 down $8 per ounce. Conditions are expected to remain choppy for the rest of the week.
Today's market actions were largely defined by the "Ben and Hank Show" taking place on Capitol Hill, where US senators wanted to examine the fine print of the Paulson Plan in order not to end up looking like they did when searching for WMD's five year ago. This time, the search is on for the FAMD's - Financial Assets of Mass Destruction that could derail everything. Odds are that the plan will pass. What it may end up containing (or excluding, for that matter) remains to be seen. Passing in its current form is not all that likely. Some senators were seen and heard grumbling about "blank checks" and related matters and appeared less than ready to sign the dotted lines. Which is par for the course, once politicians are involved. The Dow did not like the Washington gathering's dithering and lost a further 160 points as investors continued to exhibit a scarcity of confidence and a sense of resignation.
While it is safe to say that some significant fund money found its way back into the commodity complex on Monday and that individual investors took fresh safe-haven positions during last week's roller-coaster market ride, there are other potholes present in the road ahead. Reuters informs that a scarcity of money might alter the price ranges and degree of volatility which had become commonplace in everything from cotton to wheat, from gold to silver, and from copper to oil. As far as our favorite metal is concerned, the departure of fickle funds from funds seeking profit and nothing but, would be a welcome relief. Despite making for a more modest gold ETF down the road, such a change would also reward long-term holders with price stability of a higher order and possibly prevent the cycle of popping bubbles and mini-bubbles which have unnerved traditional gold investors over the past year. Here is what may be in the cards:
"The emise of Wall Street's stand-alone investment banking model could drain more liquidity from commodity markets that have already seen a mass exodus of speculative cash. Goldman Sachs and Morgan Stanley, the two biggest investment bank players in the energy markets, have agreed to tighter commercial bank-style regulation by the U.S. Federal Reserve as part of plans to restore calm to the financial sector. The Fed's action is the latest move towards reduction of risk across the finance industry that will, at least in the short term, mean participants in the markets, including commodities and oil, will have less money to play with.
"Liquidity is going to diminish in all areas of financial markets, including commodities. There's no doubt about that," said Ian Morley, director at British-based fund manager Quantum. However, Goldman Sachs and Morgan Stanley's change of status will not bar them from commodities trading. Commercial banks, such as J.P. Morgan Chase, regulated by the Fed, are active in these markets.
"Our decision to become a bank holding company will have no impact on our commitment to our commodities and energy business," Goldman Sachs spokesman Lucas van Praag said. Morgan Stanley had no immediate comment. But the banks' activities will face greater scrutiny under the Federal Reserves regulatory regime.
"It means that the regulators are going to take a much closer look at these banks, what they do, what risk they are running, their liquidity and capital positions," David Williams, head of European banks research at Fox-Pitt, Kelton, said.
"I think that is going to restrain them somewhat in terms of the activities and risks they undertake."
Commodities will have to compete aggressively for capital, which will be in heavy demand in a new lower-risk world and this will have knock-on effects.
"If you reduce the amount of investment or speculative capital you will get a little less volatility in the price, and you reduce the chances of getting bubbles," Simon Wardell, analyst for Global Insight in London, said.
Oil, industrial metals, gold and agricultural commodities have seen an inflow of money from banks' proprietary desks, institutional investors such as pension funds and hedge funds over the past year that contributed to what some said was a "price bubble".
Gold hit a record high of $1,030.80 an ounce on March 17 and slipped to below $740 an ounce earlier this month, while oil hit a record of nearly $150 a barrel in July and dipped back below $100 this month.
"The speculative or investment-type interest in the commodities markets decreased substantially as soon as prices started falling," said Frances Hudson, global thematic strategist at asset manager Standard Life Investments.
Financial market convulsions this month have accelerated the overall downturn in most commodity sectors and expectations of global economic slowdown, possible recession in the United States, Britain and Europe have further undermined confidence.
"The financial recession has happened over the last 12 months. Now we are moving into the real economy recession, which could last for up to 24 months," Morley said.
"In China and India there won't be a recession, but there will be a significant slowdown in growth rates."
A recession that affected emerging markets such as China and India would reduce commodities demand growth, which has been one of the main fundamental drivers of the boom."
The effects of the events unfolding on Wall Street, Capitol Hill, and Main Street will be felt for years to come. For now however, we have to watch gold's overnight behavior and another round of give-and-take in Washington. Some of the 'take' has already alluded to executive compensation needing a major revision. As for almost everything else, the current coverage is drowning out other stories. Does anyone still recall that the first Presidential Debate is coming up on Friday? We will take bets on how many questions will be economic in nature.
Happy Cautious Trading
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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