Ice Age 2: The Meltdown?


By Jon Nadler

Sep 29 2008 9:13AM


Good Morning,

Monday's "vote" on the US rescue package by global money markets was looking very much like a giant thumbs-down. The vote on the package itself will come in the US Congress and Senate and is expected to be finalized by mid-week. We will not bore you with the details therein, as the reaction by global markets speaks for itself at the moment.

The weekend's, as well as early Monday's news were dominated by headlines that the credit crisis is now claiming more and more victims among institutions in Europe. Rescues of UK's Bradford & Bingley Plc, Germany's Hypo Real Estate Holding AG, and the coordinated Belgium-Netherlands-Luxembourg action to save Fortis bank revealed the global ramifications of the US housing problem and underscored the intensity of the freeze that persists in interbank lending. European stock markets fell, and the euro and the pound took a pounding following the latest developments.

Over in the US, round-the-clock talks to adopt Wachovia continued, with Wells Fargo and Citigroup emerging as the most likely future parent of the US banking system's latest problem child. Oops, we can now scratch Wells from the short-list. Citi will be Wachovia's new parent. US stock futures were showing anything but a confident opening in the making, while the US dollar surged ahead gaining 0.82 on the index, to the $78.14 level. Crude oil took it on the chin, dropping more than 4% to $102.75 per barrel, on rising global economic slowdown fears. Copper has gone from best to worst performer as the global turmoil unfolds, and its by-product, silver, got dragged down as well early on Monday. The white metal lost 41 cents to $12.90 and platinum and palladium each sagged $9 amid such conditions, the former to $1092, and the latter to $213 per ounce respectively.

Gold tried for a test of the $890 area overnight after bouncing off lows that came near $865 per ounce. At the NY opening, the yellow metal was quoted at $881.00 bid basis spot dealings. Participants were fairly disoriented, as they awaited a clearer direction in other markets following soothing words from Pres. Bush about the 'bold' package in front of Congress - one which he urged the swift passage of. These are the very conditions that ought to yield a de-couple in gold from other assets and a subsequent rise in its value due to dwindling alternatives for investors to park their money in.

Should bullion manage a break with the rising dollar and sinking oil, its near-term future could indeed propel it to higher ground. To be sure, there would be a lot of work to be done given the metal's current starting point. However, with Indian buying season commencing around mid-week, and a sufficient number of individual investors seeking its shelter at this time, gold should have little trouble adding another $120 to the price charts in order to reach the millennium mark once again. Alas, there remain the words "if," "ought," and "should" present in this short-term bullish scenario. Their presence is closely related to the prospects for a deep contraction in the global economy, and to the degree to which the dollar benefits from other currencies' woes.

Our good friend, and GFMS CEO Paul Walker spoke in Kyoto over the weekend and reaffirmed his belief that gold might soon touch the four-digit mark. Paul is basing his projections on the robustness of investor demand for the metal. However, he also expressed concerns that the nature of investment demand is to be cyclical and that gold could suffer from a generalized exit from the commodities complex by skittish money. Mineweb brings us Paul's most recent observations:

Gold should surge above $1,000 an ounce as the financial crisis fuels safe-haven fund buying, but may then come under pressure as fickle investors slow purchases, the chief of metals consultants GFMS said on Sunday.

"In terms of core trading range for us, I have to say that gold going up towards the $1,000-level is not an impossibility at all," Paul Walker, CEO of GFMS, told Reuters in an interview.

"I would be surprised given the scale of the economic crisis if gold doesn't scale above $1,000," he said ahead of the London Bullion Market Association annual conference in the ancient Japanese capital of Kyoto.

GFMS predicted on September 17 that prices would soar well above $900 an ounce in the fourth quarter as the U.S. dollar weakened and investors scrutinised the U.S. government's creditworthiness. Later that same day prices staged their biggest ever one-day rally in real terms, soaring from around $775 to end just shy of $863 an ounce. They jumped again on September 18, briefly topping $900 before falling amid unprecedented volatility.

Walker said gold will be averaging above $900 in the next 12 months, but in a trading range, it could rise beyond $1,000, testing its record $1,030.80 an ounce peak from March 17.

"I think the depth of this crisis suggest to me gold prices will be at elevated levels for probably for another 12 months or 18 months," Walker said.

After a week of debate that roiled financial markets and put traders on tenterhooks, U.S. lawmakers on Sunday were set to sign off on a deal to create a $700 billion government fund to buy bad debt from ailing banks in a bid to stem a credit crisis threatening the global economy. Investors often use gold as a hedge against financial turmoil and a weakening dollar. A falling U.S. currency also makes metals priced in dollars cheaper for holders of other currencies.

But bullion has also been punished at times as part of the riskier commodities pool that had been in investors' favour until this summer, and its long-term outlook remains largely dependent on continued demand from investors.

"There is short- to medium-term upside potential, but there is also an increasing downside risk for gold prices in the long term," he said.

"The gold price could only be sustained where it is at the moment on the back of investment demand for gold. And investment demand for gold is ... very fickle or very temperamental."

Downside risks for gold are limited because of demand for physical gold for jewellery, bars and coins in markets including the Middle East and India, as well as other parts of Asia. Walker said he was surprised when spot gold dipped below $800 per ounce, but that will be the floor for the metal in the next three to six months."

Another friend of ours -also by the name of Paul (van Eeden, that is) expressed his opinion which the author sought out over the weekend, that what we are witnessing these days is a realignment of risk and a deep shaving of the excesses which have been with us for quite some time, but it is far from being "the death of the dollar" type of event which virtually all gold pundits and perma-bulls are all to eager to declare each and every week in their commentaries.

Look for continued nervousness as markets try to cope with the banking sector's falling dominoes and as they try to project the after -effects of the passage of the rescue bill this week. Speculation remains a death-defying high wire act for anyone lacking money that would otherwise be taken to Las Vegas for gaming purposes. Bundle up; the Great Freeze continues, even as cracks are developing in the ice, and they are starting in Washington.

Happy Theorizing.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal


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