Gold Tumbiles as Credit Crunch Hits E-trade

Gold

Gold was down $26.20 to $805.90 per ounce in New York on Monday and silver was down 75 cents to $14.73 per ounce. A sharp correction was expected after gold's surge in the last two months. Last week alone gold was up some 3% and silver surged by over 6% and profit taking and a correction was inevitable.





Gold also fell in GBP and EUR. It is trading at £388 GBP (down from £393) and €549 EUR (down from €560).



In Asian and European trading gold is down to $803.50 per ounce at 1100 GMT. Profit taking, a fall in oil prices and tentative dollar strength are likely the primary reasons behind this much anticipated correction. Support is near yesterday's low at $790 per ounce and below that at the 50 day moving average at $765.



The sell off is likely to be sharp but shallow. Fears that we may experience something akin to the sell off in May 2006 which saw gold fall from $730 to $560 are likely to be unfounded. In May 2006, oil was not over $90 per barrel, there was no property and credit crisis and little or no obvious systemic risk.



Those who short the market to the tune of billions are likely to be be eager to at least close some of their positions which will be supportive of gold. Many investors actually missed this move up by trying to time the market and they are waiting to buy on the dips as are other bargain hunters. In addition, none of the fundamental reasons that gold has risen in price in recent years and surged in the last few months have gone away and indeed some have intensified.

The credit crisis is widening and deepening and may soon become a solvency and bankruptcy crisis. Shares in E-Trade, the online broker that has seen its expansion into the mortgage market backfire, plunged nearly 59 per cent on Monday amid fears that its dependence on uninsured deposits could force it to sell assets at fire sale prices. "Bankruptcy risk cannot be ruled out," Citigroup analysts said in a research note Sunday.



Bankruptcy was mentioned as a possibility for Countrywide Financial, the largest U.S. mortgage lender, as well. In a quarterly filing with the Securities and Exchange Commission late Friday, Countrywide (CFC) warned that additional cuts in its credit ratings to junk-bond levels could "severely" limit its ability to raise money in public debt markets and cause it to lose bank deposits, the Wall Street Journal reported.



The worsening credit crisis will almost certainly lead to a serious recession and lead to safe haven demand for gold which is the only asset class that is not a third party's liability.



While gold might be correlated with equities in the very short term (minutes and hours) it should be clear that gold is not correlated with other asset classes over the medium and long term. The S&P 500 is down by 7.85% in the last 30 days while gold is up 7.15%. Year to date the S&P 500 is up 1.47% but gold is up by more than 26%. Not to mention the more obvious example of a multi year bull market in gold such as the 1970s when gold surged in price for 9 years while stock markets were down significantly adjusted for the significant inflation of the period. Some gold analysts of the more bearish persuasion don't allow facts to get in the way of a pet theory.



Forex and Gold

The dollar has shown tentative signs of recovery but is largely flat against the EUR at 1.4588 (from 1.455) and GBP at 2.068 (from 2.069).



The notion that the dollar rallied on "safe haven buying" is highly erroneous. This is yet another dead cat bounce for the dollar and purely a function of profit taking and an inevitable countertrend rally. When there are headlines that supermodels are bearish on the dollar, speculators rightly take profits. However, the fundamentals of the dollar remain extremely weak and it will soon resume its bear market.



Yesterday we warned of the massive risk of a huge unravelling of the Japanese yen, and to a lesser extent Swiss franc, carry trade. The yen is appreciating "too fast" and speculators need to "be careful," Yasuo Fukuda, Japan's prime minister, warned in an interview with the Financial Times on Monday.



As the yen moved to an 18-month high of Y109.13 to the U.S. dollar on Monday night, Mr Fukuda said: "In the short term, yen appreciation would certainly be a problem. Any kind of sudden change in exchange rates would not be desirable."



While he stopped short of threatening Japanese intervention in the currency markets, Mr Fukuda said: "Speculative movements need to be kept in check. What I am saying is: 'Be careful, so that it [intervention] will not happen.'"



Currency intervention as with most government interventions in the market will prove futile in the long term and an unwinding of the yen carry trade looks inevitable in the coming months. As it does with the gold carry trade (where groups have been able to borrow gold very cheaply from central banks, sell it into the market supressing the gold price, and then reinvest the proceeds into a higher yielding investment) as outlined in this article in Money Week - http://www.moneyweek.com/file /32734/the-gold-carry-trade .html .



Silver

Silver sold off sharply yesterday and gave up much of the gains of last week. Silver is trading at $14.65 at 1100 GMT.



PGMs

Platinum was trading at $1401/1404 (1100 GMT).

Spot palladium was trading at $364/369 an ounce (1100 GMT).



Oil

Oil prices remain near record highs with light sweet crude at just below $95 per barrel.



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