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Gold Investments Market Update − U.S. Government To Intervene in Markets to Prevent Run on the Dollar

Thu, Jul 17 2008, 13:23 GMT
by Mark O'Byrne

GoldCore

Gold
Gold finished trading in New York yesterday at $961.10, down $16.00 and silver was down to $18.72, down 20 cents. Gold rose in Asia before and in early European trading it is up nearly 0.5%.

While risk appetite has increased with equity markets having a renewed bout of misplaced exuberance, this is likely to be short lived as equity markets experience another dead cat bounce. Barclays reports overnight that their “sentiment-based equity risk indicator remains within extremely bearish territory, and suggests that equities may continue to sell-off aggressively.”

Poor returns and volatility in equity markets internationally is leading to safe haven diversification into gold. With the outlook for equities and bonds looking increasingly uncertain (especially in the light of the onward march of inflation in the U.S. and internationally), gold is set to continue to outperform other major asset classes for the foreseeable future.



U.S. Government To Intervene in Markets to Prevent Run on the Dollar
Gold will likely continue to outperform all asset classes with solvency and systemic risk increasing.

In his testimony yesterday, Ben Bernanke, stated that “dollar Intervention should be done rarely” but that it “may be justified in disorderly times.”

The FT reported overnight that sovereign wealth funds are cutting their exposure to the dollar due to increasing concerns regarding the U.S. financial system and economy. Central banks internationally are doing likewise and western central banks have sharply decreased their gold sales and central banks in Asia, South America and the Middle East are becoming net buyers of gold again.

Due to the real risk of a run on the dollar, the U.S. government and many others are openly talking about intervention in currency markets to support the dollar by buying dollars and it is likely that this intervention might also take the form of selling gold, the anti dollar, in order to support the dollar.

Reuters’ Mike Dolan wrote yesterday that “Three days before the last bout of coordinated central bank intervention to calm world currency markets, the International Monetary Fund's top economist opined: "If not now, when?" Many experts are now asking the same.

In 2000, when Michael Mussa urged the world's big central banks to calm the markets, it was the euro's seemingly endless slide which was perceived to be destabilising the world economy. Now, it is the plight of the U.S. dollar that is ringing alarm bells. The greenback set record lows again on Tuesday in its alarming downward spiral as severe questions are being asked by overseas investors about the financial reliability of the world's biggest economy and its financial obligations. Once lost, investor confidence can take years to restore.

The risk to the dollar in that environment is stark and given few governments around the world have any interest in seeing a further devaluation of the U.S. currency, support for concerted intervention is on the rise. The dollar's decline has clearly exaggerated oil and food prices worldwide, complicating monetary policies from the United States to the euro zone and Britain as well as to the export-oriented economies of Asia and the Middle East. As the world economy slows after a year of credit turmoil, dollar-exaggerated inflation has tied the hands of central banks everywhere from cutting interest rates, and dollar losses also squeeze the export-driven growth engines of emerging economies.

"The United States should consider intervening on the foreign exchanges," said Jim O'Neill, chief global economist at Goldman Sachs in London. "The dollar's ongoing weakness and aggravation of the oil price is a threat to the whole world. There's a danger of a vicious circle developing here -- the dollar is declining across the board, oil prices are still rising and both are causing simultaneous inflation damage. They can't just stand idly by and watch all this happen without a fight," O'Neill added.

Goldman Sachs are not alone in warning of the possibility of dollar-supportive intervention. "The conditions for successful dollar supportive coordinated intervention are now starting to fall into place," economists at French bank BNP Paribas told clients on Wednesday, saying the most important factor was a growing global consensus.”

Meanwhile, Hans Redeker, global head of foreign exchange at BNP Paribas, told "Squawk Box Europe" on Monday that an intervention to prop up the U.S. dollar is very likely if the greenback's slide continues. Despite verbally supporting a strong dollar, U.S. authorities had preferred a softer currency over the past years to rein in a widening trade deficit, but with inflation on the rise this is not an option anymore, Redeker said. "We are going to see intervention in the dollar when we see the first undershoot in the dollar," Redeker said. "Inflation expectations are undermining the bond market and impose a risk premium on the long end of the market."

Working Group on Financial Markets
Treasury Secretary Paulson said last month that he would never rule out currency intervention as a potential policy tool. He did not spell out what this currency intervention would entail but it is likely that any such currency intervention would involve the Working Group on Financial Markets (or Plunge Protection Team) buying the dollar through proxies on Wall Street such as Goldman Sachs and JP Morgan in order to support the dollar.

It is quite possible that this would also involve selling gold in order to support the dollar (as was done by the London Gold Pool in the 1960s) as has been alleged by GATA. Given the severity of the problems facing the U.S. financial system and economy and the clearly stated intentions of senior U.S. officials in this regard, it would be naïve to absolutely rule out official intervention in the gold markets today and in the coming months.

Artificial Government Manipulation to Fail and Shows Very Strong Fundamentals of Gold
While this could lead to short term weakness in the gold price, it would be very bullish for gold in the medium to long term as it would clearly show that the fundamentals of the dollar are very weak and conversely the fundamentals of gold are very strong. Many investors and institutions internationally would take positions accordingly in anticipation of free market forces and real economic fundamentals resulting in markets reaching their corresponding fair value as they always do – this fair value for gold is likely to be multiples of its current price.

Today’s Data and Influences
The financial diary is dominated by events in the U.S. today. Key earnings reports will be monitored and the U.S. housing market will be in focus again with starts and permits data scheduled. Meanwhile, the Philly Fed index will give some insights into the economic activity in July. Finally, the weekly jobless numbers will be monitored for signs of further deterioration in the economy.

Gold and Silver
Gold is trading at $963.80/964.30 per ounce (1100 GMT).
Silver is trading at $18.88/18.92 per ounce (1100 GMT).

PGMs
Platinum is trading at $1947/1957 per ounce (1100 GMT).
Palladium is trading at $429/435 per ounce (1100 GMT).

Published on  Thu, Jul 17 2008, 14:16 GMT