Spot gold prices rose out of a tight 1% range as the U.S opening drew near on Wednesday, March 12th, after Tuesday's historic "crisis action" from seven of the world's biggest central banks.
Global stock markets continued to bounce following four months of losses, and short-term dollar lending pressures eased in London.
But the cost of borrowing Euros rose for the seventh session running, and the US currency fell towards a new record low vs. the Euro at $1.5490.
Crude oil prices held just below $109 per barrel.
"Any perceived improvement in US economic fortunes [thanks to Tuesday's action] should support the Dollar and therefore weigh on gold prices," reckons James Steel at HSBC in New York. "It calms financial markets and boosts equities, reducing the need to purchase bullion as a safe haven."
Despite the central-bank action, however, "all metals appear to be well bid this morning," said yesterday's note from Mitsui, the precious metals dealer.
Gold Bullion owned with no counterparty risk has risen by more than 47% since the global banking crisis began in August last year, and while "a short term consolidation [in gold] does look possible," says Mitsui, "the bullish fundamentals should push things higher again soon."
On Tuesday morning, the U.S Federal Reserve – acting in concert with the central banks of Europe, Japan, the UK, Canada, Switzerland and Sweden – offered to lend New York dealers a total of $200 billion in government bonds for up to 28 days at a time.
In return for the extra $200bn in short-term funds, the Fed will now take higher-risk assets as collateral, accepting mortgage-backed bonds [MBS] that are not insured by government agencies Freddie Mac (FRE) or Fannie Mae (FNM).
The move echoes the European Central Bank's action during the last three months of 2007, when the open market in Spanish mortgage debt was "shut down" in the words of one trader.
The ECB accepted all $80 billion of new mortgage-backed bonds issued by Spanish banks as collateral against short-term loans.
What's more, the AAA-rated bonds the Fed will now accept as collateral for its 28-day loans are not the safe "investment grade" assets they first appear, according to Bloomberg.
"Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut [their credit ratings on] the ones that matter most," said the newswire yesterday. "AAA securities that are the mainstays of bank and insurance company investments."
One U.S mortgage-backed bond sold by Deutsche Bank (NYSE:DB) in May 2006, for example, is still rated "triple-A" by both S&P (MHP) and Moody's (NYSE:MCO). Yet 43% of the mortgages underpinning it are now delinquent.
"Money-market stresses seem to remain high," says Laurence Mutkin, head of European fixed-income strategy for Morgan Stanley in London. "Credit and counterparty concerns are not being removed by central bank actions."
And outside the hedge funds and investment banks loaded with failed mortgage-backed bonds, "a surge in the default rate is imminent and almost unavoidable" for European corporate debt says a new report from strategists at Dresdner Kleinwort.
Almost 40% of Europe's business debt will need re-financing within the next 12 months, says the report, and these "rapidly accelerating borrowing needs may cause supply fears, or cause a shortage of available funding, especially when liquidity is already tight."
Being "on risk", in short, is fast losing its appeal. Got gold yet? You might want to consider the "trust-based" counterparty risks of owning a gold ETFs like streetTracks' (NYSEARCA:GLD)...or even consider owning the metal outright instead.
Because no amount of Fed liquidity seems to be easing the big players' fears over the risk of financial default. And the inflationary chaos of monetizing the housing markets is fast looking to be the Fed's last remaining option.