Credit crunch - Stock Market - Inflation - Gold and Recession

How are these things adding up? Simple: Recession!

March 17, 2008 02:44pm

THE spot price of gold is expected to surge as high as $US1100 ($1172) per fine ounce in the near term, as investors continue to pursue the metal to insulate themselves from the fallout from a softening US economy and volatile financial markets across the world.

The price of the yellow metal rose to a new record high of $US1030.80 in Asian trading today, as investors digested news that one of the US's biggest investment banks Bear Stearns was being bought out by JPMorgan after falling victim to an ongoing crisis in credit markets.

The takeover has sparked fears that more banks may be in trouble, ahead of a meeting of a US central bank this week which is likely to result in a cut to official interest rates in a bid to boost a flagging US economy.

On the local exchange, shares in gold producers jumped with Newcrest up 3 per cent to $38.84 at 13.59pm (AEDT), Newmont up 1.42 per cent or eight cents to $5.72 and Lihir Gold up 4.07 per cent or 16 cents to to $4.35.

The spot gold price closed in New York on Friday at $US997.30 an ounce after rising as high as $US1007.10. It had closed in Sydney on Friday at $US996.60.

US gold futures hit a record high of $US1009, before the contract for April delivery on the COMEX division of the New York Mercantile Exchange settled up $US5.70 at $US999.50.

The safe haven asset has gained more than 20 per cent since the start of this year and is likely to rise further, analysts say.

Ord Minnett resources specialist Peter Arden said the gold price easily could exceed $US1100 in the near term, if the US economy shows further signs of deterioration.

While he believes the US sub-prime crisis, which has torpedoed US credit markets, has been somewhat overdone, the overall confidence in the US had been shot to pieces.

"They've been running twin deficits and been exposed on a number of fronts," Mr Arden said.

"The US financial system is in a fair bit of chaos.

"It's all started to unravel, and global investors just don't want anything to do with the US dollar.

"They (investors) don't have too many options, with the euro being a fledgling currency."

The US Fed is expected to cut the key federal funds and discount rates by 100 basis point after its board meeting on Tuesday.

"There is an inverse correlation between the value of the US dollar and the gold price, and if the interest rate is cut by 0.75 per cent, it's just going to weaken their dollar again," Mr Arden.

"We're seeing a trend that will continue for some time, unfortunately.

"It's a bellwether on how bad financial markets are and will continue to reflect the uncertainty of paper currencies."
Mr Arden said the gold price could easily surpass $US1,100.

"It's not going to stop rising any time soon," he said.
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AUSTRALIA'S property market has taken a nosedive, with falling auction clearance rates in most capital cities at the weekend.

Brisbane performed worst, with a clearance rate of 24 per cent, less than half the rate at the same time last year.

In Sydney, the clearance rate dropped below the psychologically important 50 per cent mark, with only 48.3 per cent selling, a drop of 11 per cent on the same time last year.

Volumes were markedly higher than last year in all states, partly because of the coming Easter weekend but also because mortgage stress is forcing a large number of people to put their homes up for sale.
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US rates move sparks Aussie share exodus

By Nicki Bourlioufas and wires

March 17, 2008 12:27pm

INVESTORS have dumped shares today and local finance companies have been the hardest hit as the sub-prime mortgage crisis in the US deepens.

The benchmark S&P/ASX 200 index was down 3 per cent , or 154 points to 5052.9 by 1.27pm (AEDT) after after news of an emergency financing for US bank Bear Stearns and a cut in the Fed's lending rate to banks revived fears about a US recession.

Banks bashed on ASX

Austock Securities senior client advisor, Michael Hefffernan, said the local market had been infected by US financial jitters, with finance companies some of the biggest losers.

"The US falls have translated to our markets with banks being belted mercilessly," Mr Heffernan said.

"It is clearly another round of US contagion rather than anything specific to our own market, but we tend to over-react to crises in the US as we always emulate them."

At 12.25pm, bank shares had tumbled. The Commonwealth Bank was down 4.2 per cent or $1.67 cents to $38.10, ANZ Bank had lost 5.9 per cent or $1.27 cents to $20.33 and Westpac had shed 5 per cent or $1.16 to $21.84.

By 12.28pm, National Australia Bank was down by 4.5 per cent or $1.25 to $26.41. Macquarie Group had plunged 8.7 per cent or $4.14 to $43.36 and fellow investment bank Babcock and Brown was also lower 9.2 per cent to $12.38.

At 12.30pm, BHP Billiton was down 1 per cent to $37.53 and Rio Tinto had lost 2 per cent to $128.20.

US Fed shocks markets

The US Federal Reserve in a surprise move today lowered the discount rate charged on direct loans to banks by 25 basis points to 3.25 per cent.

The Fed is expected to cut its federal funds rate by up to 1 percentage point tomorrow night in a bid to avert a severe US and global downturn.

The US central bank has already lowered benchmark overnight rates by a cumulative 2.25 percentage points to 3 per cent since mid-September.

But some analysts say cutting rates will only add to inflationary pressures in the world's biggest economy.

The Fed also announced a new facility through it which will lend to other big financial companies to try offset the effects of the US sub-prime mortgage crisis, which has seen credit costs spiral.

This lending facility will be available for business from Monday in the US. It will be in place for at least six months and may be extended as conditions warrant, the US Federal Reserve said today.

The Board also approved the financing arrangement announced by JPMorgan Chase and Bear Stearns.

Failed Wall Street investment bank Bear Stearns will be bought by JP Morgan Chase for $US2 a share. The US Federal Reserve will provide special financing to JPMorgan Chase to facilitate the deal.

Shares of Bear Stearns, the fifth largest US investment bank which has been hard-hit by its heavy exposure to the faltering US mortgage market, fell 40 per cent on Friday, reducing its market capitalisation to about $US4.1 billion.

The Dow Jones Industrial average dropped 194.65 points, or 1.60 per cent, to 11,951.09 and the Standard & Poor's 500 Index shed 27.34 points, or 2.08 per cent, to 1288.14. The Nasdaq Composite Index slipped 51.12 points, or 2.26 per cent, to 2212.49.

With AAP, Reuters