Honey, I Shrunk the Global Economy

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Good Afternoon,

The mid-week New York gold session showed that the bulls still have plenty of lifeblood left in their veins (as well as money in their pockets) and that when it comes to bad news, the metal will surely make a good newsday of its own. After testing as low as $902.40 overnight, the trade turned things around with a buying spree extending from crude oil to copper. Precious and base metals benefited from a fresh (and by now familiar) influx of speculative funds as participants raised bets that the Fed will ease in three weeks and that it may give more than the minimum quarter point given the economic environment.

At last check, gold was ahead by $19 at $934.20 amid some hesitation above the $935 level but the June contract finished with robust gains at $937.50 per ounce. Some analysts still see a declining tops pattern unfolding here and caution remains a feature of the trade as few know when one fund or another might pull the profit trigger and bail. A money-making day, nonetheless. For some.

Silver added 54 cents to $18.21 and the noble metals either minimized their earlier losses (platinum was down only $2 at $2026) or turned them into gains (palladium rose $6 to $460). The real fireworks and catalyst for today's action was the knee-jerk rise in crude oil to well past $111 on the heels of a slumping US dollar (which fell .58 to 71.78 on the index).

As the IMF warning that total losses from the credit debacle might come close to one trillion dollars ($945 billion to be precise) was issued, so did a series of countermeasures make their debut. Canada's Report On Business fills us in on the details:

"Finance ministers and central bankers of the G7 nations meet in Washington on Friday to plot their next move in response to the crisis, based on a list of recommendations from the Financial Stability Forum, a body they created."

The FSF sounds much like the new role that the Fed and the Treasury will play with regard to US market conditions going forward. Among the measures the FSF could mobilize is: " the deployment of an international team to keep closer tabs on the world's big banks while demanding better risk management and information disclosure across financial markets."

To put things into perspective, the $1 trillion hit is to be measured against a $14 trillion US economy and a $32 trillion dollar global one. The problem is that the nature of the losses can snowball into loss of confidence and deflate various economies and related markets as the contagion spreads. In its recent minutes, the FOMC expressed justifiable worries that the US contraction might actually end up being "prolonged" and "severe." A possible result? Bloomberg says that:

"Commodities, rising for a seventh consecutive year, aren't ``immune'' from slower economic growth, Fitch Ratings Ltd. said. Commodity prices are unlikely to escape a demand-led slowdown resulting from the anticipated global economic downturn,'' Fitch, a unit of Paris-based Fimalac SA, said in a report yesterday."

Also along the same lines, ShareCast reports that the IMF said: "The mortgage crisis in the US is the "largest financial shock since the Great Depression" and warned that the global risk of recession is rising." The IMF set the odds at 25% for this to happen.