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Gold Rallies as Stocks Drop, TARP Challenged as "Fraud, Waste & Abuse"

Commodities / Gold & Silver 2009 Apr 21, 2009 - 07:49 AM GMT

By: Adrian_Ash

Commodities

THE SPOT PRICE of physical gold rose as the US opening approached on Tuesday, undoing all of last week's 3.5% drop and adding to yesterday's rally at $894 an ounce.

"[Monday's] move was driven by a sharp drop in equities," says today's technical Gold note from Mitsui, also here in London, "led by a jump in bad loans at the Bank of America and a drop in revenues of 11% at IBM.


"Prior to these results, Gold sentiment in London was bearish, and as short covering added to the rally, the resistance level at $882 was easily taken out. The move stopped at the 100-day moving average of $889, but this is now acting as support."

In short, "The recent downward trendline has been broken, and if there is further pressure on equities today, a move to last weeks high of $900 is on the cards."

Tuesday saw European equities reverse early gains to stand 1.8% lower by lunchtime in London, while the Tokyo Nikkei caught up with Monday's sharp drop on Wall Street.

New inflation data meantime showed the impact of currency fluctuations for consumers in Germany and the UK, where the strong Euro but weak Pound pulled in different directions within the respective economies.

Factory-gate prices in Germany fell 0.5% last month from a year earlier. But here in the UK, however – where Wednesday's government budget is set to show a £160bn deficit, and where the Pound has lost one-third of its value against Gold Bullion since April '08 – consumer price inflation held at 2.9% in March.

Stripping out mortgage interest and indirect taxes, the old Retail Price measure rose 3.2% year-on-year.

Over in the industrial metals on Tuesday, "Press reports suggest that China's State Reserves Bureau has been selling around 20-50,000 tonnes of copper into the local spot market," says Walter de Wet for Standard Bank, also in London.

The Chinese SRB has been actively buying base metals in the local Shanghai market throughout 2009, stock-piling nickel, zinc as well as cobalt to defend local refining jobs.

Today's rumor saw copper futures at the London Metal Exchange (LME) fall a further 4%, however, while aluminum contracts dropped almost 3%.

"There are many new changes this year," said Lou Jiwei, head of the state-owned China Investment Corp (CIC) at a conference today, announcing that "Europe is showing a welcoming attitude."

In particular, "EU officials...did not mention the scrutinies" they'd previously put on any Chinese government ownership of European equities, Lou revealed, such as not exceeding a 10% stake and refusing any voting rights.

"The globalization and liberalization of financial markets provided a plentiful supply of global capital to support the inflation of a global credit bubble," said Andrew Sentance of the Bank of England in a speech today, "that centered on the United States, which developed a large current account deficit as a result."

Noting the on-going collapse in world trade – put at 12% for the first quarter alone – "[this bubble] also provided an environment in which financial institutions, and in particular banks, pursued aggressive strategies to develop as global businesses – not necessarily recognizing the risks attached to these strategies."

Meantime in Sri Lanka, the central bank governor told the Reuters news-wire that he's accepting $500 million from Libya and stands "on the verge of finalizing details" for a $1.9 billion loan from the International Monetary Fund (IMF).

The Iraqi finance minister may also seek IMF aid – as well as raising export tariffs – if crude oil prices remain at current levels.

In Ukraine – where land prices in-and-around Kiev dropped 1.6% last week alone, according to FinChannel.com – the president today ordered the prime minister, Yulia Tymoshenko, to revise the terms of an $16.4 billion emergency loan from the International Monetary Fund (IMF), agreed in November.

Viktor Yushchenko claims the first payment, made last week, included political provisions and demands not relevant to the IMF rescue.

The Ministry of Finance in Tokyo meanwhile announced the sale of new government bonds worth $110bn to fund its stimulus plans for 2009.

Total bond issuance now stands equal to $448bn, but Japanese government bond yields fell today as long-dated debt was bid higher by investors spooked by the worst recession since the end of World War II.

"Financial surveillance [of even major nations] has to take place," says Angle Gurria, head of the Organization of Economic Co-Operation & Development (OECD).

"Everybody should be saying, please come and review my system...please tell me what I can improve."

This morning in Washington, a special report on the Obama administration's new Public-Private Investment Partnerships (PPIP) said the $2 trillion program "is so large and the leverage being provided to the private-equity participants so beneficial, that the taxpayer risk is many times that of the private parties, thereby potentially skewing the economic incentives."

Announced to much fanfare late last month, PPIP offers private investment groups $1 of non-recourse loans, plus another dollar of Treasury finance, for every $1 they put up.

"Aspects of PPIP make it inherently vulnerable to fraud, waste and abuse," Neil Barofsky, special inspector-general for the existing $700bn Troubled Asset Relief Program (TARP), adds in today's report, "including significant issues relating to conflicts of interest facing fund managers, collusion between participants and vulnerabilities to money laundering."

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

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