Sunday, September 11, 2011

US markets tumble; gold poised to surpass $2,000 this week

US markets tumbled on Friday, after Juergen Stark, a governor at the ECB, resigned over the ECB's bond-buying program. The S&P 500 fell 31.67 points or 2.67% to 1,154.23; the Dow tumbled 303.68 points or 2.69% at 10,992.13. For the week, the S&P 500 dropped 1.7%, and is down 8.2% year to date. 
German plans scare markets
On Friday, Bloomberg reported that German officials were preparing German banks in case Greece defaults. The news caused investors to become more concerned about the possibility of the a Greek default. In Europe, the German DAX dropped 4%, while the euro fell to 1.365 against the US dollar, its lowest level since February.

Chinese CPI shows inflation has peaked
On Friday, China's August CPI showed an increase of 6.2% over last year, indicating that inflation peaked in July. However, it was only 0.3% lower than July's reading, which disappointed consensus expectations of a lower inflation rate. The high reading indicated that despite the worsening global economy, China will not be in a hurry to loosen monetary policy.

US initial jobless claims disappoints
Once again, US initial jobless claims data disappointed investors this week. Claims fell 12,000 to 409,000, but was higher than the 405,000 that economists expected. In addition, claims from two weeks ago were revised up to 421,000 from 417,000.

Obama announces massive stimulus plan
On Thursday, Barack Obama announced a $447 billion jobs plan. It included infrastructure spending, unemployment benefits and cutting taxes. It was larger than the $300 billion that the market expected. Some economists expect the plan to add 1%-3% to GDP, create 1 million jobs and decrease the unemployment rate by 0.5%. However, US markets still ended in the red on Thursday because investors realized that getting the bill pass Congress would be a difficult task.

German participation in bailouts is legal
On Wednesday, German courts ruled that Germany's participation in the bailout of Greece in 2010 was legal. It eased fears that a different ruling would prevent Germany from participating in any future bailouts of euro zone nations.

Switzerland pegs the Franc at 1.20 euros
In order to prevent the Swiss Franc from rising any further due to safe-haven buying, Switzerland pegged the Franc at 1.20 euros on Tuesday. As a result, gold rose to $1,920/ounce, since the Franc was no longer a competing with gold as a safe-haven for funds.

Euro zone market crash starts off week
On Monday, while North American markets were closed for the long weekend, European markets closed down over 4%. It was partly due to Geman Chancellor Angela Merkel, whose party lost in a state election. It caused investors to become concerned that it will be far more difficult for Germany to fund bailouts in the future. The German Daxx crashed 5.3%, while the French CAC tumbled 4.73% and the FTSE fell 3.58%.

Dutch Bank CEO confirms dire lending situation
Also on Monday, the CEO of Dutch bank ABN Amro, Gerrit Zalm, confirmed a suspicion that investors have had for several weeks. He confirmed that euro zone banks were facing a funding difficulty because they were unwilling to lend money to each other, out of fear that their counterparts were too heavily exposed to PIIGS sovereign debt.

Looking ahead to next week – expect gold to reach $2,000
North American markets will likely end lower on Monday, as a result of continued concern about the euro zone. Late on Friday, there was concern on Wall Street that Greece would default as early as this weekend. Fear of a Greek default will likely continue to affect markets early next week.

Gold remains the best asset class for investors. As the S&P 500 and Dow tumbled on Friday, gold rose 0.11% to settle at $1,859, near its record high of $1,920. In addition, gold mining stocks, Barrick Gold, Goldcorp and Kinross closed on Friday at US$54.55, US$55.27 and US$17.95 respectively, all withing $1 of their 52-week highs. With the Swiss Franc no longer an option for safe-haven funds because of the peg, gold will likely see increased demand. In fact, if concerns about the euro zone debt crisis continues to cloud markets next week, gold will likely break above the $2,000 level for the first time ever.  For the individual investor, the most cost-effective way to invest in gold is using strategies for bullion ETFs and gold mining stocks, as explained in Gold Investing Mastery Guide.  
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