To Bail Out Or Not?

The global finance landscape seems to have dropped into another chasm after yesterday. With the DOW down a historical 778 points and TSX 840+, it felt like the 1929 Black Tuesday, except on a Monday.

Dow's historic drop reflects financial system's challenges

After 778-point plunge, markets need private investment and bank restructuring for a recovery.

Even if the $700 billion bailout had succeeded, as massive as it would have been, it would have provided just one new leg for weakened credit markets to stand on. A recovery of the financial system will also depend on reviving the flow of private investment money, closing or consolidating weak banks, and a continuation of the extraordinary efforts by the Federal Reserve. Those may be the lessons of a rocky Monday in markets, as Congress wrestled with a Treasury-backed proposal to buy up bad debts that have clogged the banking system.

After the House of Representatives failed to approve the measure, already gloomy markets nose-dived:

The Dow Jones Industrial Average saw its largest point-drop ever ‐ 778 points ‐ and a nearly 7 percent decline, its 18th worst ever percentage decline, just under the market's drop after 9/11. The broader S&P 500 market lost 8.8 percent and the technology-heavy Nasdaq, 9.1 percent.

The "flight to safety" showed no significant easing, with Treasury bills retaining a highly unusual yield of nearly zero percent. It's the investment equivalent of putting cash under a mattress.

This certainly help explain gold's triumphant return to the $900/ounce level yesterday.

With anticipation for earnings from major players such as Pepsi and unemployment data to come still, this week looks to be an very interesting one as we watch the events unfold.

Gold's down $20/ounce so far to below $900 again in early trading. DOW has recovered nicely with TSX (almost up 500 so far), but shrewd investors will recognize that nothing has changed and the market continues in a largely downward slide - time to pick up some more gold shares if you haven't already.

Delegates polled today at the London Bullion Market Association’s (LBMA) annual meeting in Kyoto, predicted that 2009 will see a significant rise in gold prices as more investors continue to seek safe haven investments. Jeremy Charles, chairman of the LBMA, told delegates that gold’s role as a safe haven asset has returned with a vengeance amid Wall Streets woes.

”High bullion prices are here to stay,” he said. His bullish comments came as many delegates said that they forecast gold prices reaching between $700 to $1,200 an ounce in 2009. Mr Charles, who is also head of precious metals at HSBC in London, said that investors were returning to gold as confidence in the US dollar and many other asset classes was shaky. He said that the change was likely to be a structural change, rather than a short-term phenomenon that will fade away with calmer markets.

Charles said ”Gold will be looked at in a different way even when the credit crisis ends”

Jonathan Spall, the head of commodities sales at Barclays Capital, said that the gold markets were witnessing a “sea change” as bullion was attracting new players, such as hedge funds who had previously considered gold as a relic from the past. The bankers at the Kyoto meeting said that nervous investors were so concerned about the stability of the financial system that rather than simply just investing in gold as part of their job, they were placing their own physical money into gold, taking delivery of bullion and coins and effectively placing their investments outside of the financial system.

Current demand for gold coins, one of the more popular bullion investments during a financial crisis because of its portability and ability to be kept in vaults outside the financial sector, is now so intense that LBMA delegates reported that dealers around the world were running out of stock of popular coins such as South Africa’s Krugerrand.

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