23 January 2009

Gold's last Tango with US dollar over~ Its going its own way

"For the past week we have seen the strange spectacle of both Gold and DX rallying at the same time. Admittedly, we are in a holiday shortened week and 4 days trading does not a new market characteristic make, BUT...

It is a noticeable change in the character and relationship of these markets and for Gold buffs, that should be a matter of great interest.

Fundamentally, there are plenty of good arguments to support higher prices for both Gold and DX. The carnage in global credit markets, serial bank and financial institution failures
and bailouts, shrinking confidence in regulatory and prudential standards everywhere, AIG, Lehman Brothers, Citibank, Merrill Lynch, the Iceland Banks, the UK Banks, Irish Banks and Indian IT companies, are enough to send shivers down the spines of the bravest savers and investors alike. The Sovereign wealth funds who jumped into equity and bond markets in March last year, thinking that they could time the market’s bottom, have been handed their heads. More nuanced thinkers still realise that the flow of toxic debt has not been disclosed, marked to market or contained. Royal Bank of Scotland’s surprise announcement that it had lost another 28 billion pounds since the UK governments bailout last year shows the reality of bad debt exposure in previously impeccable names.

There’s quite enough bad news in financial markets to frighten many into hiding their money under the mattress, a sure fire bull signal for Gold. Indeed if there is anything in the old mantra of Gold being a safe haven in times of trouble then arguably the Gold price should be very much higher than the mid $800s. Given the disastrous management practices that have decimated banks and the broker dealer base, and governments’ hapless response, the question for Gold is really “If not now, then when?”

For DX the bullish arguments are equally strong. Over the next 2 years, US Treasury will have to sell an unprecedented amount of debt to foreigners, to fund its current deficit, plus TARP, auto lifelines and other fun parties that outgoing Treasurer Hank Paulson was happy to subsidise. The rise of the Democrats, by nature, spenders of the public purse will add vast amounts to US indebtedness with President Obama signaling trillion dollar deficits for years to come. And the pending appointment of Timothy Geithner, presently head of the New York Fed, to become the new Treasury Secretary is a sure sign that Paulson’s “save them whatever the cost” spirit lives on. Geithner, more than others is recognised for working closely with Paulson on the TARP program, mistakenly applauded by those who have, or who stand to benefit. As the President of the NY Federal Reserve, Geithner had the prime responsibility to oversee the regulation and supervision of financial institutions in his district. The mission statement on the NY Feds website states “Our primary objective is to maintain a safe and competitive US and global banking system!” On that evidence Mr Geithner has been a conspicuous failure and arguably is the prime suspect for the most sensational oversight failure in banking history, although UK officials may give him a run.

What is it in this performance I ask, that makes this guy a suitable candidate for any senior government position let alone Treasury Secretary?

With bond yields at record lows and massive issuance of US Government securities a given, the question is whether creditor nations and those savings rich Middle East and Asian countries will be as willing to fund the US financial system and economy as they have been to date."

Needham

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