Gold falls further as dollar takes safe have status

In the Lead: “Achoo! I think I’m coming down with something…”

An EU commission of regulators has drafted legislation that would (among other things) permit investors to sue for damages in the event there would be proof that a rating agency was negligent in some way. The top three such firms (S&P, Moody’s and Fitch’s) have taken plenty of “incoming” in recent months as regards their declarations about the rating of the US, and many have correctly reminded audiences that the same agencies were all too eager to bless certain parties before and during the so-called “subprime crisis.” Let’s see what the response will be to the EU’s “Rate This!” challenge.

Backlash such as this from the EU should not come as very much of a surprise at this juncture. Some of the ‘heat’ the markets are feeling is the direct result of a string of recent downgrades, warnings, and opinion coming from the ratings space. Meanwhile, a warning of a different kind, about a different system, was issued by the IMF yesterday. For several weeks now we have tried to bring you stories relating to the rise of the unofficial lending sector in China. The IMF has now finished its first review of China’s banking system and it did not have too many comforting words to say about it.

The review cites ‘financial sector vulnerabilities’ and ‘domestic bank asset quality’ along with ‘high real estate prices’ and ‘the credit boom’ as items to be concerned about, even if the country’s 17 largest banks appear sufficiently strong to endure certain shocks that might occur. The IMF recommended interest rate reforms, a freer trading environment for the yuan, and continued monitoring of the Chinese banking system.

Suffice it to say that some of the nervousness in certain markets is also manifest as a result of economic barometer readings such as the ones coming out of Europe lately. The Old World basically experienced no growth in the quarter that just passed. The region’s GDP eked out only a 0.2% rate of expansion despite fairly robust, isolated metrics that showed the economies of France and Germany advancing at 0.4 and 0.5 percent respectively.

What the figures imply is that while the aforementioned countries did not do too poorly at all, the shrinkages that Greece (at 0.4%), Portugal (at 0.4%), and Italy (at 0.2%) experienced constituted a large enough drag to result in the final overall number that economists are fretting over. Europe is essentially skirting (or might already be in) a recession. Not everyone is afraid, however, that the Eurocrisis is about to push the global economy into another contraction, even if the EU does experience such a phase.

Thus, a quote at $1.354 for the euro that was seen on Tuesday and this morning’s breach of the $1.35 key value marker (when combined with rising bond yields for Italy) did not come as a big shock to too many traders. But, hey, just because the euro backed away from the $1.40 area and is struggling to keep above the $1.35 mark does not mean it has been the worst performer of 2011. No, that dubious distinction belongs to…the Canadian loonie.

Surprised? So are many who saw Canada’s dollar as the beacon of shining trading and profit hope amid all of the world’s embattled currencies. Well, it turns out that while everyone was distracted with the euro’s value (and fate) the CAD under-performed the euro (!), the British pound, the Aussie $, and the rest of the G-10 currencies as well. Chalk this one up as well among those “Whodathunkit?” items that keep piling up lately.

Another item on that same list of head-scratchers is the sale of the roughly 34 tonnes of gold from one place one would have thought was not likely to do so any time soon; the Paulson & Co. basket of assets. It was one thing for George Soros to liquidate his bullion stash after having labeled the metal as the ‘ultimate bubble.’ It was also another thing for Mr. Mindich’s Eton Park to sell its entire ‘stack’ of 813,000 SPDR Gold Trust shares (2.52 tonnes). But Paulson & Co.? The largest holder (at one point 31.5 million shares) of the gold ETF???

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