Gold Outlook Strong As Global Credit Crisis Worsens

Commodities / Gold & Silver Jan 25, 2008 - 12:54 PM
By: Gold_Investments

The London AM Fix at 1030 GMT this morning was up to $921.25 (up from $891.50 yesterday). Gold rose to new record highs in British pounds and euro. It fixed at £465.28 (up from £456.15 yesterday) and €625.64 (up from €609 yesterday).

Gold has rallied despite the dollar recovering slightly from yesterday's sell off and its strength is due to fears regarding inflation, volatility in global stock markets and a decrease in supply from South Africa (the world's second largest producer).

Continuing concerns about the dollar and inflation and safe haven demand is leading to higher gold prices. The dollar is flat after yesterday's sharp sell off against the pound and the euro (1.978 and 1.4720 see FX below) and oil has risen to above $90 again (up 0.5% to $90.02 <NYMEX February>).

The credit crisis remains in the very early stages and unfortunately a lot worse is to come. The FT reports that traders believe that the debt markets are set to get far worse – especially the corporate debt markets. Hedge fund managers and the trading desks of some of the savviest firms on Wall Street are expecting a severe downturn in the corporate debt market. A big part of their bet is that bonds will perform far worse than in previous meltdowns, because financial engineering has created so many layers of debt on top of unsecured bonds, which are the last debt to get paid in the event of a default.

Bloomberg reports that ‘Banks' $230 Billion Backlog of Debt Isn't Shrinking' and that “banks are unable to find buyers for a $230 billion backlog of high-yield, high-risk debt, freezing leveraged buyouts and raising the risk of more writedowns on Wall Street. Lenders have about $160 billion of so-called leveraged loans and $70 billion of junk bonds that they underwrote last year. They were stuck holding the debt as the collapse of the subprime mortgage market in the U.S. drove investors from all except the safest government securities. Banks including Citigroup Inc., Goldman Sachs Group Inc., and Morgan Stanley are struggling to unload debt from last year's record $438 billion of leveraged buyouts. The market for high-yield bonds has been shut since July in Europe and sales in the U.S. slowed to $850 million this year from $6.3 billion in the same period in 2007, data compiled by Bloomberg show.

Billionaire investor George Soros said the fallout from the current global financial crisis (the worst since World War II) will bring about the end of the dollar's status as the world's reserve currency. "The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency,' Soros said in a debate today at the World Economic Forum in Davos, Switzerland. "Now the rest of the world is increasingly unwilling to accumulate dollars.'

We are far from out of the woods yet and a very high degree of risk aversion remains advised.

Support and Resistance
Talk of gold declining to $800 is diminishing fast and looks to have been overly bearish.

Strong support now remains at $840 to $850 which was previous resistance and interestingly $840 is very close to the 50 day moving average (DMA) and Fibonacci support. $900 becomes short term psychological support but $900 will need to be closed above on a weekly basis before the psychological level of $1,000 is likely challenged in the coming weeks.

Gold is now technically in unchartered blue sky territory but the big round figure of $1,000 gold (much like $100 oil) looks to be reached sooner than many analysts had expected.

FX
Announcements regarding a fiscal stimulus package, by the U.S. Government created a positive tone for the market. As Wall Street rallied the Carry Traders bask in the moment of glory as the low yielding yen continued to be sold across the board. Most of these Carry Trades, in particular the euro and sterling against the yen are reaching important Fibonacci retracement levels which could prove to be significant resistance, triggering the next downward leg. The longer term trends lower in these currency pairs remain intact.

The strength in commodities continues to underpin the so-called commodity currencies with the Australian, New Zealand and Canadian dollars all rallying further against the Greenback. Strength was also seen in the other commodity currencies with the South African rand performing well too.

Silver
Silver has surged to new 27 year record highs at $16.35/$16.40 at 1145 GMT.
Ted Butler, one of the most respected analysts of silver, wrote a new article, on Silver Seek - http://news.silverseek.com /TedButler/1201020133.php

Gold Investments believes silver will reach $20 in the first half of this year and may trade as high as $25 per ounce.

PGMs
Platinum has surged $100 to new record highs and was trading at $1680/1690 as per above (1145 GMT) on news of the power outages shutting the gold and platinum mines in South Africa (the world's largest producer of platinum).
Palladium was trading at $378/383 an ounce (1145 GMT).

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