GOLD CHALLENGES THE US DOLLAR AS CURRENCY OF CHOICE The biggest stories in the financial markets today was the government bailout of AIG, the 450 point drop in the Dow and the 10 percent rise in gold prices (+$80), which the largest since September 1999. As we have been warning in prior reports, if global fears persist, there would come a point where repatriation of US dollars would be overshadowed by foreign investors liquidating their dollar denominated investments. We saw that in today’s price action with the greenback selling off across the board as gold, the ultimate form of safe haven becomes the currency of choice. In the eyes of Sovereign Wealth Funds and central banks, commodities including oil may be the safest bet. Supply and demand dynamics for oil have not changed dramatically so $95 oil may be seen as a bargain. Amidst all of the volatility in the financial markets, the one overriding theme is risk aversion. Government Pulls Out All the Stops, No One is Convinced that it is Enough. The US government has pulled out all of the stops but the market is not convinced that the storm has passed. The price action in everything from stocks, bonds, the US dollar and gold indicates that every new rescue is having less of an impact. In addition to spending $85B to bailout AIG, the SEC has also issued new short selling rules that prohibit naked short selling in all US equities. Their goal is to reduce volatility and based upon today’s price action, it hasn't worked. Investors from around the world are nervous and not willing to take on counterparty risk as trust becomes a commodity these days. LIBOR rates increased by the most in 9 years indicating that banks have become extremely cautious about lending. The rates of US Treasury 3 month bills fell to the lowest amount in 54 years, while the 2 year swap rate hit a record high. Gold prices surged more than $85 an ounce. The TED spread, which is the difference between what banks and the Treasury pay to borrow ballooned to a wider level than Black Monday in October 1987.