The Morning Gold Report: Gold Consolidates in Lower Half of Range

July 29 a.m. (USAGOLD) - Gold is maintaining a generally consolidative tone, just below the midpoint of the broad $1,032.20/845.50 range. Consolidative activity in oil and the dollar as well are helping to keep the yellow metal well contained.

Important US economic data later in the week may be sufficient to end these summer doldrums. The market will be watching Q2 GDP (advance) on Thursday, along with initial claims for the week ended 26-Jul. On Friday, Jul nonfarm payrolls come out. Any negative data that lend credence to the recessionary scenario is likely to give gold a boost.

Our research shows that the months of June and July have, with near perfect consistency, allowed investors to buy gold at a price below what is ultimately determined to be the average annual price. Over the past 35-years, more than two-thirds of the average annual gains in the gold market have been notched between August and year-end. With July winding down and August about to begin, now may be a great time to add physical gold to your portfolio.

The International Monetary Fund categorized the global financial markets as "fragile" on Monday. The IMF noted that systemic risk remains elevated and that bank balance sheets are under renewed stress from deteriorating loan portfolios. At the same time, declining share prices are making it more difficult for the banks to raise new capital.

Merrill Lynch did its part to confirm the IMF's assessment, announcing an additional $5.7 bln in writedowns on Monday. You may recall that Merrill reported a $4.6 bln Q2 loss less than two-weeks ago. Merrill will also seek to raise $8.5 bln in capital by selling new stock.

The concern is always that there are more banks out there on the verge of additional writedowns. Are these as yet unknown banks big enough to absorb the writedowns and perhaps raise additional capital? Are they big enough to warrant a government bailout, or will they fall into the hands of the FDIC as IndyMac did several weeks ago. Two more banks, First National Bank of Nevada and First Heritage Bank NA, met this same fate just this past weekend.

The much discussed housing bill is awaiting an expected signature from the President as the S&P/Case-Shiller index showed that home values in 20 major cities fell an additional 0.9% in May. Still in doubt is the ultimate cost of this bill to the American taxpayer.

CBO estimates suggest that the bill, which will essentially backstop mortgage giants Fannie Mae and Freddie Mac, will cost about $25 bln over the next two fiscal years. However, the legislation also raises the national debt ceiling by $800 bln to $10.6 trillion, suggesting that the government is at least preparing for bailout of huge proportions.

Given that the GSEs own or back about half of the $12 trillion US mortgage market, they really can't be allowed to fail. Just about every financial institution around the world holds Fannie and Freddie securities. If the GSEs were allowed to fail, the resulting financial turmoil could end up costing much more than the proposed bailout. I suppose the most troubling aspect of the housing bill is that Congress has essentially provided a blank check.

Admittedly backstopping the GSEs is the lesser of the two evils, but the American people need to be prepared for the costs. The $800 bln increase in the debt ceiling suggests that the government is prepared for all $780 bln of Fannie and Freddie liabilities linked to subprime and Alt-A debt to go bad.

Where do you suppose that money is going to come from if needed? My guess is that it will come straight off the printing presses. That is going to continue driving down the value of the dollar, while adding to already oppressive inflation.

Physical gold offers the best protection against a declining dollar and the resulting inflation. Gold is the best means to preserve wealth in an environment of massive writedowns in the financial industry, bank failures and bailouts - when you can never quite be certain what surprise might be coming around the next bend.