GOLD – WHAT HAPPENED?

Well I’m back to posting again after a 2 week gap! There’s a lot to catch up on so its going to take a few posts.

Gold has been slam-dunked, Oil is on its way down, the USD rebounds and the rally in Commodities is over!!!
So what happened?
Lets begin with an interesting article I came across on ‘ Central bank Intervention in currency markets’
http://www.goldmoney.com/en/commentary.php#current Mystery Solved 7 Aug 2008.

The Triggers:

The slowdown in Europe will result in the ECB cutting rates.
The USA lead things on the way down, and so will be the first to recover.
The global slowdown has lead to a fall in oil consumption.

Weakening trends in the EURO and Oil and a strong USD

If there’s one thing that’s clear now, it’s that the ECB is in an equally tight spot as the FED. The FED has company!!! Does the ECB cut rates to avert a recession or does it fight inflation?

Are falling Oil prices a good sign, if they are due to contraction in demand?
Clearly speculators are bailing out too, but global demand is slowly!

The USD has pulled back sharply as the ‘Short USD/Long commodities’ trade unwound and the current uptrend is almost as severe as the breakdown in Gold. It should meet some resistance near the 78 level on the USDX.(Remember that the USDX index is EURO dominated)
So is the worst really over? (AGAIN)
While gold looks really beaten up at the moment, and Gold stocks have fared even worse, not a lot has changed in the last 2 weeks.
Central Banks are still dead scared of deflation!! And will use every means possible to get another bubble going. So that’s going to mean more intervention,bailouts and handouts to the clowns that got us into this mess in the first place.
Its also important to remember that Gold has historically never been strong in the May – August period, (usually bottoming out by August end.), so the USD rebound has added to the severity of the sell off.

I have been buying gold on declines, as it has smashed through one support after another ( $ 878.5, $ 850, $ 790), by staggering my purchases on the way down. The selloff has been so sharp that I expect a pullback especially as the Euro/USD has strong support at the 1.45 level.

So is this the return of Goldilocks? I think not!

----The US Housing market is still in a mess
----Freddie Mac and Fannie Mae need a bailout – or let’s just change the rules of the game for them!
----Are the write downs in the financials over? Or is the best yet to come? ( Like the recent settlements in the Auction rate Securities Lawsuits) More Capital raising / financial firms cutting Dividends?
----I ask again? What is the current market value of the ‘Toxic Bear Stearns securities held by the FED’ – No write downs there I hope?
----Is the strength in the USD due to any inherent fundamental change in the USD, or just due to the slowdown elsewhere?
----Can the Fed really hike rates to support the USD?—risking a meltdown in the US housing market and a collapse in US Consumer sentiment and consumption. On the other hand, how would the USD react, if the FED cut rates late into 2008?

----How long are the Central Bank Currency market interventions going to keep things afloat? Are they tackling the crux of this crisis( overleveraging and cheap credit) or just delaying an impending meltdown?
----Will the Volatile USD, (now strengthening), cause large USD holders to try to diversify out of the USD?
----Who’s going to blink first and do a bailout of a major Financial Institution- The Fed or the ECB?
----Even if the strength in the USD holds for a while yet, would you put money into stocks in an environment of inflation and slowing growth, where defaults across many sectors( not just financials) are likely to increase? I would be extremely wary of any analysts trying to call a bottom in stocks (especially the financials)!!!
----What impact is the Stronger USD going to have on the financial results of large US multinational companies whose results until recently have been ‘bolstered’ by the sliding USD. Extraordinary Forex losses in the second half maybe?

MERRILL'S QUEST FOR CAPITAL

This was just the link I was looking for, when I wrote yesterday's post.

Here it is : FACTBOX: Quotes from Merrill's Thain on capital needs.

http://www.reuters.com/article/marketsNews/idINN2824127720080729?rpc=44&sp=true

Meanwhile the Fed has extended its emergency lending programme to investment firms to January 2009.

I wonder if we are all set for another round of writedowns of Toxic CDO's that have no market.

MERRILL LYNCH: Wall Street Credibility and Sovereign Wealth Fund Capital

You really can fool all of the people all of the time (or so it would seem); Writedown after write down, Lies and more lies: and yet Wall Street believes in the Investment Banks!!! The DJIA was up over 266 points yesterday!
"Fool me once, shame on you. Fool me TEN TIMES!!, shame on me."
Investors just don't seem to get it yet.

On Thursday 17th July, 2008 Merrill Lynch lost $4.9 billion for the June quarter.
John Thain (Merrill's CEO) reiterated his stand that Merrill did not need to raise more capital. (By selling equity). http://www.iht.com/articles/2008/07/18/business/18merrill.php

12 DAYS later, a stock sale is announced !!!! Yes they need more capital AGAIN!!!
Meanwhile, Mr. Thain is also looking to sell stakes in Merrill’s valuable assets (Bloomberg LP and BlackRock Inc) to raise capital.

The Bullish Bear says-----------------

Merrill sold some $30.6 Bn worth of TOXIC CDO’s at 22 cents on the dollar.

• Firstly, after Merrill Lynch, who’s going to be next? http://www.forbes.com/wallstreet/2008/07/29/merrill-citi-banks-biz-wall-cx_lm_0729writedowns.html
• Did the CDO’s turn toxic overnight or in the last 12 days since the June quarterly result.
  $ 30.6 Bn -> $ 11 Bn at the end of June -> $6.7Bn yesterday.
• Was the sale triggered by the Undercapitalized Bond/ CDO Insurers who could not pay up?
• Was the sale cheaper than marking them to market (since the really toxic stuff may have no market) which may have triggered more confusion and asset fire sales?
• What is the market value of the ‘Toxic Securities’ of Bear Stearns that the FED now holds; not 22 cents on the dollar I hope??
  

Wall Street Credibility and Downside protection for Sovereign Wealth Funds
Yesterday, a further $ 8.55 Bn stock sale was announced, including a stock sale to TEMASEK (Investment Company of the Government of Singapore).

Thanks to a downside protection clause, Temasek will be compensated for the nearly 50% loss suffered on their December 2007 ‘bailout investment’ in Merrill Lynch.

As per the clause, if Merrill raised more capital in the 12 months following the Temasek deal, at a stock price of less than $48, Temasek would be compensated for the difference.

The Wall Street Journal calls it a Sweet Deal for Temasek. http://online.wsj.com/article/SB121735266454993851.html?mod=googlenews_wsj

I would call it STREET SMART investing!!
When you must deal with someone whom you cannot trust completely, like bankers that just can’t be truthful and disclose to you the true value of their assets and liabilities:
You Protect Yourself.
This is definitely going to set a precedent, as new Capital becomes more expensive and comes with many strings attached.

Worse still, as investment banks look to dump Toxic CDO’s and avoid Mortgage related securities, the slowing MBS market is going to result in the unwillingness of Banks to lend to the Residential Housing market in the US.
If you are looking to buy the US Financials now that the worst is behind us - >Caveat emptor

HERE WE GO AGAIN : US FINANCIALS: FOOL'S RALLY !!!

Well until yesterday, led by a fall in Oil prices, the US Financial Sector rallied sharply from recent lows.
''''The credit crisis was over - Freddie Mac & Fannie Mae bailed out - and the housing market settling down''' .................UNTIL YESTERDAY.
As data from the US Housing sector continues to deteriorate, the banks may be set for a fresh round of writedowns.
An endless number of bailouts and low interest rates on the USD, are going to erode the purchasing power of the USD in the long run.
I wouldn't trust this rally, and would instead look at adding to gold positions on further declines in the precious metal.

LUXURY SEGMENT : SLOWDOWN AHEAD

The Luxury and up market segment is slowly but surely feeling the impact of the slowdown in global economic growth. New and fast growing markets in Asia may not do enough to offset the slowdown elsewhere.

SLOWING DEMAND - RISING COSTS
As Starbucks is closing down stores and fighting rising input costs, L’Oreal is moderating growth forecasts.
A weak USD, is also affecting the margins of European companies like Porsche SE, LVMH, Luxottica and L’Oreal.

As the expectations of a recovery in the second half of 2008, are now being postponed to 2009; companies are looking to just meet, and not beat their targets for 2008.

DJIA - USDX - GOLD : YEAR TO DATE

LOOK NO FURTHER : THE CHARTS SAY IT ALL !!

FASTEN YOUR SEAT BELTS : TURBULENCE AHEAD

Equities the world over have had a miserable first half for 2008. Indian and Chinese Equities have sold off very sharply. As the DJIA battles it out at the 11,000 mark; markets in Europe are struggling with the ever strengthening Euro. (EUR/USD now nearing 1.60).

Meanwhile Gold ended last week at $964.60, and has outperformed equities in 2008.

GOLD: THE PERFECT STORM

As Freddie Mac & Fannie Mae continue to struggle, and the DOW broke down below 11,000; the consolidation in Gold appears to be progressing well.

Gold is now just over the $960 mark, and the USDX Index is treading lower.

We could be on the verge of a major break out in the Gold Price here.

The Perfect storm

• Tensions in the Middle East,
• A possible Bailout of the GSEs,
• Surging Crude Oil prices
• A possible DJIA close below 11,000??

Wait and Watch!!

FREDDIE MAC & FANNIE MAE : NEW LOWS

As the stock prices of Freddie Mac & Fannie Mae continue to plunge, the US Treasury Secretary and the US Fed are doing their best to calm things down. While they denied that Freddie Mac & Fannie Mae are insolvent, they claim that the GSEs are adequately capitalized.

Henry Paulson said that he had been assured by the regulator of Fannie Mae and Freddie Mac (The Office of Federal Housing Enterprise Oversight) that the companies have enough capital.

Talk about being behind the curve. As these Government sponsored enterprises (GSEs) are struggling to survive, and may need a GOVERNMENT BAILOUT themselves, the Treasury Secretary and the FED, expect them to support the collapsing US Housing market.

Will we see a Government Bailout or a further easing of their Capital requirements?

Clearly too big to fail!!!!!

WATCH THIS SPACE

INDIAN BILLIONAIRES & the SENSEX

The recent stock market meltdown has eroded the fortunes of many Indian Billionaires.
Certain Large cap stocks have been beaten down severely and value is now emerging.
http://www.business-standard.com/common/news_article.php?leftnm=10&bKeyFlag=BO&autono=327869
Billionaires in the Media (Ramesh Chandra of Zee TV), Real Estate (KP Singh of DLF), and Infrastructure Logistics (GM Rao of GMR Infra & Gautam Adani of Mundra Ports) sectors have been the worst hit.

The stock market here is facing a confidence crisis, and no one is willing to back the ‘Long term India story’, given the turbulent global equity markets.

Expectations of inflation are getting built into the system, and that it going to make the ongoing battle with inflation all the more difficult.

Rising interest rates, rising fuel & food prices and tighter lending policies by banks will slow down growth rates. The upcoming quarterly results may confirm the slowdown.