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Gold Weakens on Warren Buffett's Offer to Bail Out Monoline Insurers

Commodities / Gold & Silver Feb 13, 2008 - 07:30 AM GMT

By: Mark_OByrne

Commodities Gold was down $14.20 to $908.40 per ounce in trading in New York yesterday and silver was down 20 cents to $17.23 per ounce. Gold traded sideways in Asia before falling late in Asian trade to below the psychologically important $900 level. It fell to a low of $896.55 before rallying in early trading in Europe and is trading at $902.95. Silver has also fallen and is down to $17.10 per ounce.

Gold also fell in the other major currencies. The London AM Fix at 1030 GMT this morning was at $905.75 (down from $920.25). Gold fixed at £461.46 (down from £472.60) and €621.40 (down from €634.04).

The Buffett announcement is not what the markets originally thought and not the simple cure for all the bond insurers ills. When this is realised by the marketplace risk aversion will return which will likely ensure gold consolidates at these levels prior to reaching $1,000 in the coming months and over $1,200 per ounce before year end.

Buffett's Offer Spun as Panacea and Life Saver

Markets greeted Warren Buffett's announcement that he had offered to take on the liabilities of troubled bond insurer's with glee and appetite for risk returned to the marketplace with stocks and the dollar rising and gold decreasing.

Hopes of easing of the current credit market turmoil is understandable but some of the reporting of the Buffett's announcement was very poor and the story was ‘spun' in some quarters of the financial press with very simplistic and misleading headlines such as ‘Buffett offers to back municipal bonds'. The salient and most material fact is that this does absolutely nothing for the collateralized debt obligations (CDO's) and the billions of the most toxic elements of the debts and exotic vehicles insured by the bond insurers.

The fact is, as Buffett himself clearly spelt out, that: "It doesn't do anything for the CDOs, but I'm not sure anything is going to do much for the CDOs," he said. "We'll just have to find out how that plays out."
13-Feb-08 Last 1 Month YTD 1 Year 5 Year
Gold $
S&P 500

Nils Pratley summed it up succinctly in the Guardian “it was the snap headline the market had been dreaming about: "Warren Buffett offers to bail out monoline insurers". But when it came yesterday, it soon became clear that Buffett is offering no such thing. The great man wants only the choice cuts of the troubled bond insurers - the insurance they have written on debt issued by US cities and local authorities. He has no wish to take a punt on the toxic stuff, namely the guarantees behind bonds backed by sub-prime mortgages, otherwise known as collateralised debt obligations (CDOs).

Reality seems to have impinged subsequently and stock markets in Asia were mixed while those in Europe are mostly down. In uncertain times like these it pays to deal with reality and to always realize the truth rather than blindly believing the simple and desired for angle or story.

Throwing Money at the Problem
Associated Press reports this morning (‘Bush Ready to Sign Economic Aid Package') that “if government rebate checks ranging from $300 to $1,200 for just about every household don't spur a consumer spending spree strong enough to cure what ails the economy, Congress is ready to throw more money at the problem.”

The problem in the first place and the cause of much of the woes affecting the U.S. and spreading to the global financial system was cheap money, money printing, debt creation and throwing money at all problems on an unprecedented scale. The notion that further cheap money and throwing money at the problem, in other words the cause of the problem, will now miraculously solve the problem is wishful thinking at best and very delusional.

International Demand – Cash or Gold is King?
Gold will continue to be supported by investment demand internationally due to the international credit crisis but particularly from increasing demand in Asia, the Middle East and internationally. While Indian demand has slowed down recently it is important not to look at this one fact by itself as demand in other regions is outweighing the recent slowdown in demand from India.

The Star Business reports that ‘More investors turn to gold amid struggling stock market'. “Cash might be king, but gold could again rule. Amid a struggling stock market, rising prices and uncertain prospects in the property sector, many Chinese people think that gold is the safest and most reliable asset.”

A range of developments over the past year seems to show the increasing allure of gold. “At the 2007 China Gold and Precious Metal Forum held last December in Shanghai, the China Gold Association estimated that more than a million Chinese then had gold investments. In Beijing Caishikou Department Store, the capital's largest gold jewellery, accessories and decorations retail store, two tonnes of gold bars commemorating the Lunar Year of Rat, retailing at 238 yuan a gram, sold out in under two hours in November. China's first gold investment instrument, CGS Standard Gold Bars, sold 2.7 times more bullion last year than in 2006.”

As risk appetite returned to the equity markets yesterday as a result of the Buffet announcement, so it also returned to the FX market. The Yen was sold across the board and particularly against the high yielders. As the details of the Buffet proposal become clear and the market realizes that Warren will not be riding in on his white horse to bail out the bond insurers then risk appetite will very quickly wane. We can expect to see a return to risk aversion, read carry trade unwinding. Some feel that the risk aversion could unfold as dollar strength as safe have investor seek US dollar assets but this is hard to fathom and unlikely to last in the long term.

Inflation is on everyone lips and Central bankers are caught between the proverbial rock and the uncomfortable very hard alternative. Inflation versus growth is set to become the Battle Royale of 2008 and there is likely only one winner – gold.

Sterling reacted to the UK inflation numbers yesterday and with the BOE's inflation report due today the short term trend and tone of the Sterling market will be determined. However, both the single currency and the British Pound remain range bound against the Greenback. The FX market appears to be in a period of consolidation and the near term trend appear unclear however long term trend of higher commodity prices will continue to underpin the commodity currencies bar the South African Rand.

While the Pound, the Greenback and the single currency fight for fiat currency dominant status, with each other, they will continue to lose out to hard assets and to the global finite currency that is gold.

Support and Resistance
Support is now at $886 which was the low last Tuesday on February 5th. Next support is at the monthly low on January 21 st of $861. Strong support is at $850 to $860. There appears to be strong physical demand internationally for gold in the $890's and thus gold is unlikely to fall far below $890 except for a short period of time.

Silver is trading at $17.06/10 at 1200GMT.

Platinum has sold off from record highs and is trading at $1914/1924 (1200GMT).
Palladium has remained firmer and is trading at $425/431 an ounce (1200GMT).

By Mark O'Byrne, Executive Director

Gold Investments
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Dublin 2
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Gold Investments
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22 Dec 08, 12:10
Silver for 2009 forecast ?

What do you predict for the future of silver, say 1 to 3 yrs.

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