Daily Commentary

Treasury Secretary Paulson to Propose New Regulations

Gold and silver are both higher today with gold up $3 and silver up $.05 in early trading.  The markets had been up more overnight but eased back on some continued end of the quarter profit taking.  The dollar is about unchanged at 71.60 and oil is up $.41 at $106.03 a barrel. 

Treasury Secretary Paulson will speak this morning and propose new regulations and broader powers of regulation for the Federal Reserve in the financial sector.  Typical of politicians, they are closing the barn door after the horses are out.  The decision to impose further regulations on this industry is purely a political decision.  With or without these new powers, the existing regulators could have obviously imposed greater scrutiny over the financial system.  However, it makes good press for the politicians to act like they are doing something even if it is totally meaningless to the current problem.  There is absolutely no doubt the politicians knew what was going on in the financial sector.  They knew of the predatory lending and the fact the derivatives market was a Wild West show with no regulation whatsoever.  In fact, when regulation of this industry was proposed about five years ago the banks lobbied to kill it in committee. 

The big question now is not whether we are going to regulate these firms in the future, but how the problems in the housing market and in other credit derivatives will be unwound without collapsing the system.  Right now the financial markets are pretty much frozen.  The efforts that have been made by the Fed and others to attempt to correct the problems and to restore liquidity to the markets have been an abject failure.  As it stands right now, the government has made extraordinary moves to save the banking system.  Not only have they put up $29 billion to attempt to save Bear Sterns, they have also pumped enormous amounts of money into the system, loaned $200 billion against essentially worthless securities, and continue every day to loan more money against these worthless securities.  They have also allowed Federal Home Loan Bank to become involved in taking over some of this worthless debt and have authorized Fannie Mae and Freddie Mac to essentially put about $1 trillion more money into the housing market.  Still, no results.   Analysts say there will be at least $400 billion in write-downs yet to come.  Some think the write-downs will be even greater.  On thing seems clear, these problems are not going away any time soon.  The majority of the mortgage resets will begin to occur in April, May and June.  They will continue throughout the year.  We will have to take a "wait and see" attitude as to what happens and the volume of foreclosures that occur.  I suspect at some point there will have to be some action taken to put a moratorium of sorts on home foreclosures.  Whether this is the wisest move remains to be seen. 

However, something is quite clear: all of the efforts to resolve these problems are extremely inflationary.  Over time the dollar will continue to deteriorate and that will be the catalyst for gold moving substantially higher.  The only question at hand today is whether the correction has completely run its course.  While no one knows that answer, gold and silver are clearly in areas where they are attractive buying opportunities.  Some analysts believe the correction has been completed.  Most analysts believe over the next several months gold will rally back above $1,000 and many believe that gold will reach above $1,250 by the end of the year.  Most recently Deutsche Bank stated they think gold will be over $1,100 by the end of the year.  Societe Generale raised its average forecast to $1,025 for the year.  These are very conservative institutions.  They do not make wild forecasts.  Therefore the predictions that we are referring to are generally considered to be conservative. 

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