3 month libor rate

The 3 month libor rate has now come back down to 3.83%. This is quite significant. It was previously around 2.8%, but it skyrocketed to around 4.8% during the past month (during the peak of the credit crisis). The 3 month rate is used as the benchmark for interbank lending. A 4.8% rate essentially stated that banks had completely stopped lending money to other banks - confidence issue. In a nutshell, global credit had completely frozen up. As everyone is aware, governments around the world (over the past couple of weeks) collectively injected trillions of dollars into the global banking system (and provided numerous banking loan guarantees, coupled with taking equity stakes in banks and guarantee of bank deposits) in order to unfreeze the credit system. At first there was hardly any improvements. However, there has been solid improvements over the past couple of days.

Of course, it will still take quite a while before the thawing makes it to the lower levels of the system, but nonetheless this is good for junior companies across the globe, and especially (capital intensive) junior resource companies. It might be more beneficial to junior gold companies (in the nearer term) than junior base metal companies, due to the fall off in demand for base metals.

Hopefully it is even more beneficial for junior companies like Century, with a bridge loan and LT Debt agreement already in place, that are working through the process to gain closure and subsequent drawdown. It is impossible to know if or how quickly the lower libor trend will work for junior companies, and specifically Century, but it's positive nonetheless. If the libor rate had stayed at 4.8% (even after the massive injection of funds by the governments) then it would have made everything even more challenging.

The other major challenge gold companies have right now is the lower drifting of the gold price. It's difficult to know how much of the gold price sell off is due to regular funds and hedge funds being in emergency mode in order to meet redemptions. There is probably some of that, but is probably also a tug of war between gold bulls and gold bears. A lot of people are expecting an asset deflation evironment for all assets. However, a lot of people also eventually expect monetary inflation to exist due to the massive injection of cash into the system. The US dollar is a superstar right now (due partly to being treated with "safe haven" appeal - people around the world have been piling into US treasury bills, but they have had to buy the US dollar first before buying the treasury bills), but the massive injection of liquidity most likely means that the dollar will come under pressure again at some point down the road.

The key problem long-term gold investors face right now though is that it might take a least few months or much longer before the massive cash injection works its way through the global system, and monetary inflation rises to the surface, along with US dollar devaluation. It's unclear how the gold price will hold up in the interim. Gold price confidence is one of the keys. A lot of investors (especially new mainstream gold investors) are very disappointed with the COMEX gold price. I think everyone expected gold to be stronger over the past month, during the crisis. Investment demand is essential right now so let's hope that the fringe gold investors understand the longer term potential of the gold price.

In the near-term, the gold price will need to navigate around a few other key factors also. Some people are predicting a $50 oil price, but it's really impossible for anyone to know. OPEC is meeting in a few days, and will be reducing production in order to give the price some support. I think there is a massive tug of war even within OPEC. Countries like Iran and Venezuela desparately need the cash from high oil prices. As a result, they need to see the price in the $80-90 range. Other countries, like Saudi Arabia, can live with $50-60 oil. The other problem with low oil prices is that a number of oil fields (both existing and planned for development) cannot make it (in this environment) with prices so low. As such, the short-term destruction from a low oil price could end up having a sling shot affect on the oil price longer term (in the opposite direction). I think some people recognizes this, and will push for a more stable price, but the oil price might end up being too forceful for anyone or anything to influence (other than hedge funds moving their massive dollars in and out of course, which is artificial, as we know). Anyway, it looks like OPEC might cut between 1 to 2 million (barrels per day) once they meet. However, there is talk that it could be as low as .5 million and as high as 3 million - I guess it depends who wins the tug of war within OPEC.

Gold might get a bit of support once the US Fed meets near the end of the month. The Fed is expected to lower the Fed rate by 50 basis points. Unfortunately, other key US trade partners around the world will likely cuts rates also, which will mostly negate the weakness that we would normally get from the US dollar index.

Globally, there still seems to be a number of money managers that understand the monetary inflation expectations. As such, they are planning to keep a portion of their portfolio in gold. Hopefully it will be enough to support the gold price in the short-term, but it remains to be seen. It would be good if the gold price stayed above $700 US. It would be good if the gold price stayed traded say in the range of $700 to $850, until it is ready to move higher. That would be a very healthy gold price range (although $600 US could still work also), especially since cash cost for most gold mining companies would come down quite a bit in that environment. It would be really nice to get back to $900 US and above again, once everything aligns again - it could happen at anytime or it take a few months (a lot of it depends on investor sentiments).