Gold Holds Firm as Fed Adds Another $800bn of Credit Risk to Its Balance-Sheet

From Chris Mullen at GoldSeek.com...

The Gold Price recovered an early $15.35 fall to $802.55 an ounce on Tuesday, touching $830.50 by about 09:00 in New York before it fell back off into the close.

Gold Bullion still ended with a gain of 0.13% for the session, while silver rose $0.173 to $10.493 by the US opening, and fell $0.29 to $10.03 by late morning in New York before it rallied back higher into the close.

Silver ended with a loss of 0.39%. Crude oil erased most of Monday's gains and ended over 6% lower.

The US Dollar index dropped markedly again, but Treasuries rose on worries over the economy and the continual need for more bailouts.

Along with a negative GDP reading – down 0.5% year-on-year in the third quarter, vs. last week's estimate of -0.3% – as well as rebounding US Consumer Confidence due to lower gas prices, record drops in home prices were reported Tuesday, while the FDIC grew its list of problem banks to the highest since 1995 at 171.

None of these stories could out-weigh the Federal Reserve's latest announcement, however, as it promised a huge $800 billion lending program direct to auto-loans, student loans and mortgages.

Of the $800bn promised, $600 billion is going towards mortgage-backed securities and debt from Fannie and Freddie, with $200 billion going towards holders of securities backed by consumer debt. Some $20 billion from the Treasury Department’s $700 billion TARP will back that lending, and will result in leverage of 10 to 1 on the Fed's balance-sheet.

As former St. Louis Fed president William Poole noted in an interview with Bloomberg News, "Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk."

The Fed's balance sheet has already grown by $1.3 trillion this year. Tuesday saw the cost of insuring US Treasury bonds against default rise to a record high, with credit default swaps on $10 million of T-bonds edged up to a record 50.0 basis points – some $50,000 a year for 10 years.

The Dow, Nasdaq, and S&P ended mixed and near unchanged in more volatile trade as the Nasdaq was weighed down by poor tech company forecasts.

The Gold Price in Euros fell to €628 on fresh Euro strength, platinum gained $11.50 to $865, and copper dropped a couple of cents to about $1.65.

Gold and silver equities fell as much as 5% by early afternoon, but they then rallied back higher into the close and ended with slight gains.

Wednesday's data releases bring US Durable Goods Orders for October (expected down 2.5%), Initial Jobless Claims for last week (expected at 537,000), Personal Income for October (expected up 0.1%), and Personal Spending (expected down 0.7%).

At 09:45 EST comes Chicago PMI for November, expected at 38.5, and at 10:00 follows the New Home Sales data for October, expected at 450,000, as well as Michigan Sentiment for November, forecast at 58.0.