On March 18, the day of the FOMC meeting, the Nymex closed its Gold trading, as it does every day, at 1:30 PM. The (April) spot future contract moved little on the day, but it did rise, to a new all time high of $US 1004.30 on the close. Forty-five minutes after the open outcry Gold market closed, the FOMC announced its decision on official US interest rates. The Fed Funds rate was cut by 0.75 percent to 2.25 percent. The Discount rate was cut by 0.75 percent - after having been cut by 0.25 percent two days previously. Its new official level is 2.50 percent.
Within minutes of the Fed's announcement, Gold was down $US 25 or so in after hours trading, back below the $US 980 level. By the close of trading on March 19, Gold had lost $US 59. By the close of trading for the week on March 20, Gold had lost another $US 25.30. It closed for the three-day (in the US) Easter break at $US 920.00. Now THAT'S a "correction"!
Of course, the "correction" was by no means confined to Gold. It spread right through the commodities sector. Silver was savaged, Platinum continued the big falls it had started the previous week. Base metals and grains were sold off. And Oil dipped below the $US 100 level from the levels above $110 it had reached a week earlier.
In essence, this is a situation in which the "hedge funds" and other leveraged investors are being gutted. They spent this week selling from the top, liquidating positions in which they were showing a profit in order to prop up or at least delay the demise on their positions which were bleeding red ink and/or generating margin calls they could not meet.
The rest of the investment community simply stampeded towards what they perceive as "safety". And that perception still revolves around Federal government debt paper. The yield on one-month Treasury paper almost disappeared entirely. Three month paper was yielding about 0.60 percent by March 20 - a lower yield than it reached when the Fed Funds rate was at its 1.00 percent lows from mid 2003 to mid 2004. A year ago, the three-month Treasury note was yielding 5.18 percent. A month ago, it was still yielding 2.2 percent. On March 19, 2008, the day after the FOMC meeting, the yield plummeted to 0.59 percent. There's not much "downside" left in Treasury yields.
But, blithely disregarding all this, the reaction to "market" events this week in the majority of the mainstream US financial press has been a prolonged sigh of relief. Typical of this was a headline which appeaered on Bloomberg.com on March 21: "Commodities Drop, Rally In Dollar, Stocks Vindicate Bernanke". Here's a quote from that article: "Concern that the central bank would let inflation get out of control eased after the Fed cut its key interest rate by 0.75 percentage point on March 18, less than the reduction of at least 1 percent that investors had expected." (emphasis by The Privateer).
That's right, it seems that by cutting rates by "only 0.75 percent" (blithely ignoring the fact that the Discount rate was cut by 1.00 percent - in two slices 48 hours apart), the Fed has re-established their reputation as "inflation fighters". The Fed cut less than they were expected to, you see, the universal expectation was for a cut of 1.00 percent.
Perhaps we can respond to this best by quoting the current (Mid March - #599 - published on March 16) issue of The Privateer: "The desperation of the financial system is best illustrated by one simple fact. On March 13, the day before the Fed stepped in to bail out Bear Stearns, the betting on the futures market that the Fed would cut by 1.00 percent was zero. On March 14, seeing the bailout, the betting on a 1.0 percent cut had surged to 64 percent."
So, by actually not doing what nobody in the futures market expected the Fed to do five days before they didn't do it, the Fed has cut rates "less than expected". This has led to a huge sell-off of real goods, a stark upturn in the US Dollar and on stock markets led, of course, by the markets in the US.
By forcing through and financing the buyout of Bear Stearns by JP Morgan Chase last weekend, the Fed has done much more than engineer a forced sale at $US 2.00 a share of a brokerage house whose shares sold for $US 170 less than a year ago. They have also eliminated all the Credit Default Swaps (CDS) on the Bear Stearns' books. The market on CDS has quadrupled from $10.2 TRILLION to $US 43 TRILLION over the past two years. But to get the payoff on a CDS, the company issuing the bonds against which the "insurance" is written must default. Bear Stearns didn't do that. Instead, the CDS issued by Bear Stearns have become the "responsibility" of JP Morgan Chase.
And because JP Morgan Chase is considered a much "stronger" financial entity than Bear Stearns, being a money center bank and not simply a big broker, the hedge funds which were showing such gaudy paper profits on the Bear Stearns CDS in their portfolio have now seen those paper profits erode alarmingly. What else could they do but raise "liquidity"? And you don't have to look very hard to discover where they raised it.
For Gold, the $US 1000 level has now become a significant resistance level. Because it was only penetrated by a small amount before the big Gold sell-off in the wake of the Fed rate cut, Gold investors are still looking down, not up - for more on this see our $US 1000 - The Last Hurdle. That hurdle still remains, made much more significant by the big sell-off this week. It is clear that the "management" of the financial system has now taken on desperate proportions.
Last week, the chart stood at $US 995. This week, we added the $US 1000 "X" - and that is as far as Gold got. With the $US 84 sell-off on March 19-20, the chart has now reversed all the way down to the top of the previous distribution zone - that's the first support point. To show any real weakness on this downturn, the Gold price is going to have to go well below the $US 900 level. The $1000 high could be the end of the "second leg" in this Gold bull market, or it could be just a correction. We'll see.
(Chart appears here in original analysis.)
We have extended the table below into 2008, even though Gold in all four currencies in the table is now well above its 2006 highs. Gold breaking out to new all time highs in $US terms at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold has improved upon those January levels in all four currencies. In fact, spot future Gold closed above the $US 1000 level for the first time ever on the first two days of this week. But then came the big sell-off, and the recovery of the US Dollar.
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