Liquidity Crunch Brings Down Precious Metals

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In this liquidity strapped market, gold and silver continue to decline.  Last week, gold fell 3.5%, while silver declined 6.5%.  Now, gold and silver continue to head lower as liquidity evaporates and the US dollar strengthens.

Earlier this week, one measure of bank funding stress hit its highest level since May 2009.  The measure is the TED Spread, which is the difference between the three-month Libor and three-month Treasury bill yields.  As the spread rises, it signals that banks face more difficulty raising short-term cash.  The spread, currently near 48 basis points, is well off its peak of 464 basis seen in 2008 though.  Nonetheless, the Federal Reserve has determined to run another stress test on US banks.  The stress test will include price movement changes similar to the ones that occurred after Lehman Brothers collapsed.  The stress test will seek to bolster confidence in the US banking system as concerns over the euro zone spread throughout the world.

Investor Insight: These Big Banks Face New Stress Tests

Today, gold and silver are once again declining.  Commodities are down across the board as investors rush to raise dollars.  Jim Rogers said, “With MF Global going bankrupt, which was a gigantic commodities firm, there was a lot of artificial forced liquidation of commodities.  People have to sell whether they like it or not.  It’s artificial selling right now.”  John Paulson, the founder and President of hedge fund Paulson & Co., recently made news by selling 11.2 million shares of the SPDR Gold Trust ETF in the third quarter, representing a 36% decrease in his GLD holdings.  While some may be quick to assume he turned bearish on gold, investors should consider that Paulson’s hedge fund faced redemptions near $8 billion, and the GLD sale was most likely a result of selling a winner in order to satisfy redemptions.  With GLD up over 20% through the end of the third quarter, it is easily one of the best performing assets this year.

Early Wednesday, the US dollar index gained strength and broke through resistance at 78.50.  The euro sank to 1.332 as Germany experienced a dreadful bond auction.  The poor results show “the lack of appetite for Europe in general and suggests that if even Germany cannot attract buyers, then the structural negatives are even worse than we thought,” said Jeremy Stretch, currency strategist at CIBC in London.  The US dollar index has received a boost in recent months from the euro debacle, as the euro is the heaviest weighted component in the dollar index.  Further adding to euro concerns is a note from JP Morgan this morning.  Analyst Greg Fuzesi explains, “With the Euro area economy entering a potentially deep recession, we now think that the ECB will cut its main policy interest rate to just 0.5% by mid-2012.”  He also expects the Euro area to be in a recession until late 2012.

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