Credit Crunch Meltdown and For Gold the Trend is Your Friend

By: Gold_Investments

Gold
Gold was trading sideways in Asia and early in Europe and is trading at $764.50. Resistance is at last week's 28-year high of $770, while support is at $750 and there is strong support at $725. Gold's price oscillator (PPO), is showing that gold is not particularly overbought. It is still below 3 whereas after the last serious move in the gold price into the May 2006 highs, the PPO reached as high as 6.

The PPO is a popular technical indicator system which is like the MACD or using moving averages to better show a market's trend and momentum. The fundamental tenet of technical analysis of all markets is to make the trend your friend. The trend in gold remains firmly up.

There is much talk of a record long position in gold being bearish for the price in the short term. This traditionally is the case in any market - when everyone is long, the buying move is generally exhausted and the market is likely to sell off. However, it is not as simple as that in gold. As along with the record long position there is a record short position. Therefore there is a titanic struggle taking place between the gold longs and the gold shorts. This battle has in recent years been won by the gold shorts. However, given the extremely strong fundamentals and some extremely determined buyers this may not be the case this time.

Of huge significance and unacknowledged by many analysts is the increasing likelihood that central bank gold reserves cannot be mobilised in order to cap the gold price. This was recently outlined by two Citigroup analysts, John Hill and Graham Wark, who wrote that central banks faced a choice between a global recession and their continuing “control” of gold. They said that the avalanche of central bank bullion sales earlier this year was “clearly timed to cap the gold price”, which is the Gold Anti-Trust Action Committee's (GATA) long held contention. But central banks have chosen to focus on staving off global recession. “We believe that the policy resolution to the credit crunch will take the form of a massive, extended ‘reflationary rescue' in a new cycle of global credit creation and competitive currency devaluation which could take gold to $1,000/oz or higher.”

Thus, the record long position is bearish in and of itself however in conjunction with the near record and massive commercial short position it can be construed as bullish as if the shorts are forced to cover their positions as they were in 2005 we could see a commercial signal failure when faced with massive losses on their short positions, the commercial shorts are forced to panic cover en masse creating a massive surge in the gold price. This eventuality is looking increasingly likely, especially in the light of the very significant macroeconomic and systemic risks facing the U.S. and many western economies.

• The Bank of England warns in its latest twice-yearly financial stability review that equities are vulnerable to a possible economic slowdown and warns the U.S. dollar might fall sharply “if the change in investor sentiment towards U.S. securities experienced recently were to persist”.
The UK financial system also “remains vulnerable” to new shocks from the global credit squeeze in an unexpectedly severe assessment of risks still facing banks and financial institutions. The Bank picks out the commercial property sector, where prices are already falling, for being “particularly prone to further shocks and to rises in the cost of finance”. There has never been a banking crisis in the UK, such as the one that led to the downfall of Northern Rock last month, without a simultaneous commercial property crisis.

• The ramifications of the incredible losses of Merrill Lynch and the fallout from the mortgage crunch which worsened substantially yesterday, with single-family home sales plummeting to the lowest level since 1998 have yet to be realised by many in the markets who remain in denial.

Merrill Lynch reporting an unprecedented $7.9 billion write-down for bad loans — the latest in a weeklong series of setbacks for the economy and the markets. Standard & Poor's Ratings Services cut its ratings on Merrill Lynch & Co. citing the company's "staggering" third-quarter writedown. Standard & Poor's credit analyst Scott Sprinzen said the downgrade follows Merrill's "startling announcement" that it booked a "massive" loss during the quarter. The news from Merrill Lynch — which reported the biggest quarterly loss in its 93 years of existence — was particularly "startling" and "staggering," said Standard & Poor's Corp., as the world's largest brokerage had been considered healthy and relatively immune to the mortgage virus infecting other big banks on Wall Street.

The huge loss gives the firm the dubious distinction of suffering the biggest meltdown as a result of this summer's credit crunch. The Wall Street Journal reports that it eclipses even the roughly $5B write-down the much-larger Citigroup (C) took. To put the numbers in some perspective, it equals 19% of shareholders' equity, 14% of market cap, more than its entire net income in 2006. It's also nearly four times the firm's $2B of compensation expenses in the 3Q, which was down from $3.9B a year ago.

• We remain in the early stages of this credit crunch which will now almost certainly lead to a serious and prolonged recession in the U.S. Thus Jim Rogers', George Soros former partner, decision to sell all his U.S. assets and invest in yuan, yen and Swiss francs and commodities and precious metals, particularly silver, will be seen as prudent and wise.

Forex and Gold
The yen gained against both the dollar and the euro yesterday as increased risk aversion saw an unwinding of carry trades. The news yesterday of Merrill Lynch's first quarterly net loss in six years and $7.9bn in write-downs fuelled concerns about the ongoing impact of credit market problems. Meanwhile, yesterday's U.S. existing home sales data were weaker than had been expected, indicating that the U.S. housing market problems are far from over and reinforcing the view that the Fed will cut interest rates when it meets next week.

The dollar traded in a narrow range to the euro yesterday. Increasing speculation about Fed rate cuts continues to weigh on the U.S. currency. Comments from Warren Buffett that he expects further dollar weakness also exerted some downward pressure on the currency.

The trend in stock markets may well continue as a dominant feature for forex markets today. The state of the U.S. housing market remains under the spotlight with the release of new homes sales figures. Durable goods orders and weekly jobless claims numbers also feature.

Silver
Spot silver was trading at $13.74/13.76 (1130 GMT).

PGMs
Platinum was trading at $1445/1450 (1130 GMT).
Spot palladium was trading at $357/362 an ounce (1130 GMT).

Oil
Oil, which last week touched an intraday record of $90.07, rose Thursday in Asia, extending a price increase that came after figures showed large and unexpected declines in U.S. crude and gasoline inventories last week. Light, sweet crude for December delivery rose US$1.08 to US$88.18 a barrel in electronic trading on the New York Mercantile Exchange.

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