Gold up sharply as bear market rally fades
Posted on 25 April 2009 with no comments from readers
Gold finished the week up 5.1 per cent at $913 while silver jumped 8.4 per cent to $12.90 as precious metals became a safe haven from the faltering six-week old bear market rally.
This left gold prices at their highest levels for three weeks but fell short of a third break of the $1,000 barrier. However, the precious metals clearly established their position as the place to be as the bear market rally breaks down.
Bull about the bear
Now showing a precocious 28 per cent gain in six weeks the stock market rally is facing strong headwinds in the upcoming bankruptcy of two top US auto companies, a commercial property slump, a deteriorating international financial environment, and general over-optimism about recovery prospects in the banking sector.
Last week the Wall Street pundits did their very best to keep the rally going despite some deeply unimpressive results from bell weather stocks like UPS and 3M. Results that came in slightly less worse than analysts own forecasts were greeted as returning prodigal sons.
This is of course nonsense and spin of an obvious kind. Nobody really wants to be seen to be rocking the boat as the US establishment led by President Obama attempts to talk up the market.
The problem is that fundamentals always triumph over hot air. It is like trying to blame the media for the troubles of the world: if only they stopped reporting events then they would go away.
Reality counts
Sadly reality has a life of its own. The US banking sector has a long and painful recovery path to come but most crucially has not hit the bottom yet. Ask Meredith Whitney, the analyst that first downgraded Citi at the start of the crisis.
And what about the executives at Chrysler and General Motors who are busy preparing to file for bankruptcy? This is a sign that things are still getting worse, not better.
Global trade is also firmly in a slump. Japanese exports in March slumped by 47 per cent instead of 49 per cent, and if that is an improvement worth shouting about then this correspondent is from Mars!
Reality will bring investors back to the conclusion that with the money supply being inflated by an unprecedented amount the only safe havens are precious metals, and that is what we started to see last week.
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From The Daily Telegraph today:
Swiss risk advisers Independent Credit View said a “second wave” of debt stress is likely to hit the UK and Europe this year as the turmoil moves from mortgage securities to old-fashioned bank loans.
A detailed “stress test” of 17 lenders worldwide found that European banks have much lower reserve cushions than US banks, leaving them acutely vulnerable to the coming phase of rising defaults. “The biggest risk is in Europe,” said Peter Jeggli, Credit View’s founder.
Deutsche Bank has reserves to cover a default rate of 0.7pc, against non-performing assets (NPAs) of 1.67pc; RBS has 1.23pc against NPAs of 2.43pc, and Credit Agricole has 2.63pc against NPAs 3.64pc. None have put aside enough money.
By contrast, Citigroup has reserves of 4pc against NPAs of 3.22pc; and JP Morgan has 3.11pc against NPAs of 1.95pc.
“The Americans are ahead of the curve. European banks are exposed to US commercial real estate and to problems in Eastern Europe and Spain, where the situation is turning dramatic. We think the Spanish savings banks are basically bust and will need a government bail-out,” said Mr Jeggli.
The IMF said European banks have so far written down $154bn (£105bn) of bad debts, or just 17pc of likely losses of $900bn by 2010. US banks have written down $510bn, 48pc of the expected damage.
The recent rally in the US seems to have a lot of strong support. Banks and financials finished off on a strong note. FAS WFC and BAC were all strong through out the day on Friday. During the day there was a strong sell off on Financials and they dipped big time but were bought right back up and regained all their losses within minutes. I was quite surprised with Friday’s bullish support on the DOW and the S&P500 held up really well.
I personally was going short and bought FAZ shares. Sooner or later there has to be a reversal and things will turn negative.
A few comments here:
1. China Wants Trading Partners to Use Yuan:
It’s no secret that China does not want the USD to be the world’s reserve currency, and for all of the obvious reasons. Within the past 4 months, they’ve:
- signed contracts with six countries, including Indonesia, South Korea, Hong Kong, Malaysia, Belarus to use the Yuan as the trading currency
- established long term contracts with a number of other countries (e.g. Argentina) to trade in Yuan.
Bottom Line: set up the Yuan as a legitimate alternative to the USD for global trade
2. China Secretly Buying Gold:
Go here for details: http://www.nakedcapitalism.com/2009/04/guest-post-breaking-news-china-has-been.html
If China wants the Yuan to be a viable “alternative” to the USD, then they have to build up their gold reserves, and that is exactly what they’re doing. China indicated that it wants about 5,000 tons, and while they have a “long way to go” to get there, the Chinese are patient. With a massive amount of gold reserves, China gains the respect of the global financial system and western countries, some of which are now desperately trying to hold onto their gold reserves.
3. JP Morgan ~ You’ve Been Warned!
JPM closely monitors the gold price every day, as the sun rises in Sydney, Hong Kong, etc. When the gold price is rising, JPM (at 3AM New York time!!!) does its thing, and enters a short position to bring the gold price back down (JPM and HSBC have approx. 98% of all current short positions on the COMEX, and they’ve never been “net long” since 2001!). They have become so transparent that the Chinese are now playing them “like a fiddle.” Clearly JPM (and to a lesser extent, HSBC) are now in the cross-hairs!
This Chinese strategy should serve as a warning shot to JP Morgan and others who massively short the paper gold markets on the fraudulent COMEX (again, perhaps on behalf of their government client).
We are living in interesting times! Dangerous, but interesting and exciting!
From Clive Maud yesterday, one of the best technical analysts:
Should we see a combined breakdown by both the dollar and Treasuries soon, we could see an extraordinarily powerful rally in gold and silver that quickly takes gold to new highs and would result in potentially spectacular gains in Precious Metals stocks. In this scenario interest rates would rocket and the nascent “recovery” in the US economy being so widely touted at the current time on major US TV networks would quickly be consigned to the trash can.
Telegraph today:
Goldman Sachs set a price target 10pc lower than at present, at about $45, for July, while Peter Voser, chief financial officer for Royal Dutch Shell, told reporters last week that it was “difficult to see
an uptick in the oil or gas price” in the next 12 to 18 months.
The weak demand for oil will add fuel to the arguments of those who argue the current bull run on the equity markets is a classic fools’ rally.
“The further (the oil price) rises, the more sceptical you become,” said Mark Pervan, head of commodities research at ANZ. “We are operating in a global recession and oil markets are a proxy for global growth.”