Fannie and Freddie Failure Would be Catastrophic for Global Financial System

By: Mark_OByrne

Gold finished trading in New York on Friday at $819.30, down $7.60 and silver was down 14 cents to $13.36. Gold and silver traded sideways in Asian trading prior to a sell off in early European trading this morning. Gold is trading at $811.30/811.70 per ounce (1030 GMT).

Gold has fallen this morning on a sharply stronger dollar on weak European data (rose from above EUR/USD 1.47 to as high as 1.4595 in a matter of minutes) and lower oil prices. The dollar remains near six month highs against the euro. The fall in the euro was due to German business confidence declining by more than expected to a three-year low in August, adding to concerns Europe's largest economy may slip into a recession.

Equity markets internationally are down again on continuing fears regarding the U.S. financial system and the outlook for the global economy.

The International Monetary Fund has cut its forecasts for 2008 and 2009 world economic growth. An official said the IMF had downgraded its world growth forecast for this year to 3.9 per cent, down from 4.1 per cent. The IMF now projects 2009 growth of 3.7 per cent, down from 3.9 per cent. “Commodity prices will remain high and volatile... market turbulence will go on through 2009,”said the official. The IMF has been overly optimistic in its economic forecasting for some months and continues to be as they are underestimating the marked increase in systemic risk.

Bloomberg has reported that Yu Yongding, a former adviser to China's central bank, has said that the failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system.

``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.''

``The seriousness of such failures could be beyond the stretch of people's imagination,'' said Yu, a professor at the Institute of World Economics & Politics at the Chinese Academy of Social Sciences in Beijing. Yu is ``influential'' among government officials and investors and has discussed economic issues with Premier Wen Jiabao this year.

Today's Data and Influence
Today sees the release of a number of closely watched US indicators, including consumer confidence, the Case Shiller House Prices Index and the new home sales report.

Gold and Silver
Gold is trading at $811.30/811.70 per ounce (1030 GMT).
Silver is trading at $13.13/13.19 per ounce (1030 GMT).

PGMs
Platinum is trading at $1410/1418 per ounce (1030 GMT).
Palladium is trading at $285/290 per ounce (1030 GMT).

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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