You know about lemmings, right? Those little furry critters that once in a while, for no discernible reason, supposedly get together in hordes and commit mass suicide by running over the edges of cliffs. It is a quaint story. In fact, lemmings are as conscious of risk as is any other small comparatively defensive mammal in a world full of carnivores.
If they were not so risk averse, they would never grow up to the point where they could indulge in their supposed mass stampedes. In fact, lemmings are no more "suicidal" than any other animal. Being a rodent, they do "breed like rats" and tend to migrate in large numbers. In any such migration, there are bound to be some casualties.
But the myth has grown up about lemmings, and lends itself particularly well to episodes of financial market contagion such as we have seen over the past week. All of a sudden, the invincible stock markets have taken a fearful pounding. The best estimate is that a total of about $US 1.5 TRILLION has been wiped off the cumulative valuations of world stock markets this week. The contagion flowed into currency markets, and most certainly into precious metals markets where Gold was sold off hard and the price of Silver was gutted.
And where has all the "liquidity" raised from this HUGE sell off gone? Where it always goes in the FIRST throes of a situation in which long complacent investors suddenly re-awaken to the concept of RISK. It has gone into government debt paper. The yields on US Treasudy two and five year paper have plummeted by more than 20 basis points this week. At 4.44 percent, the yield on five-year paper is at a low for the year and a full 81 basis points (0.81 percent) below the Fed Funds rate of 5.25 percent. This is its lowest level in well over a year - since January 26, 2006 when the Fed Funds rate was 4.25 percent, a full 100 basis points lower than it is now.
In terms of its "discount" to the Fed Funds rate, 0.81 percent below it, we cannot find an instance when the five-year yield has been as low as it is now. The concept of lemmings throwing caution (let alone risk aversion) to the winds is a myth. The same cannot be said for "sophisticated investors".
And, of course, as this "lemming like rush" into Treasury debt has accelerated, so has the proliferation of analyses, also for the benefit of those same "sophisticated (and not so sophisitcated) investors" which point gleefully to the fall in the Gold (and Silver) price this week. "See, they all proclaim - Gold is NOT a safe haven at all!
In not much more than a month, global markets have gone from a state of utterly mindless complacency to a state of rapidly rising uneasiness which is, in many quarters, rapidly developing into outright fear. On US and most other stock markets, the problem is that the indexes did not snap back after the big sell-off on February 27. By Friday, March 2, many of them were substantially below their closes on that date. And, of course, Friday, March 2 was the day when the second BIG precious metals sell-off took place, the first one having taken place in after-hours "access" trading on February 27.
The problem began in the US "sub-prime" mortgage market and has now ballooned into what looks suspiciously like the beginnings of a global market panic. In all such situations, the first knee jerk reaction is to "get liquid" and then to pile into what is still perceived by most as the ultimate safe haven - government debt paper. That is what has been happening this week.
Two weeks from now, on March 16, a first anniversary will take place. This one will see no "celebrations", nor will it be talked about in "polite" investment circles in the US or anywhere else. March 16 is the first anniversary of the day when President Bush signed into law a raising of the Treasury's debt ceiling by $US 781 Billion to its present level of $US 8.965 TRILLION. As of March 1, 2007, the official Treasury funded debt "to the penny" stood at $US 8.788 TRILLION - that's $US 604 Billion higher than it stood on March 16 last year. It is also $US 3.061 TRILLION higher than it stood when Mr Bush first took office in January 2001.
Most of that $US 3 TRILLION plus which the Treasury has piled up in debt since then is now owned by foreigners, and most of that is owned by two nations, China and Japan. The most popular "reasons" given by the US financial press for the big sell off this week have been the bursting of the bubble in the CHINESE stock market and the reversal in the "carry trade" of the JAPANESE Yen.
US investors in particular are running off the cliff which leads to US Treasury debt. It is a well-known (but not discussed) fact that China and/or Japan could bring down the entire US economy, not to mention the US markets and the US Dollar, merely by uttering one word - "SELL". That has not slowed down the stampede into Treasury debt in any degree. Lemmings certainly are "risk averse". But mainstream investors? We don't think so.
We say again, the knee jerk FIRST reaction to any financial ruction, especially after a VERY long period of ever increasing investor complacency is to get "liquid", and there's nothing more liquid than precious metals, and then to stampede into government debt, the ultimate "safe haven" in the paper debt-based money world. After all, governments and financial establishments can weather almost any kind of market debacle, up to and including a crash in their paper currency. But they can't weather a crash in the paper which "backs" their paper currency, the debt paper which they MUST keep issuing in order to function at all.
What happens AFTER that first reaction has run its course is what happened in the 1970s, when global "liquidity" stampeded OUT of the paper markets even faster than they had stampeded into them and started to chase REAL goods and above all, precious metals. There is no way of knowing how long the "transition" will be. There is no way of knowing how much damage will be done to the paper markets (and to precious metals prices) before the transition takes place. We can be confident of only two things. The first one is that the transition WILL take place. The second one is that it will be delayed as long as possible by the financial powers that be, both inside AND outside the USA.
The last time that investor complacency came under this much pressure was in the wake of the big US stock market sell off which lasted from 2000 to 2002. As you know, that marked the beginning of the current precious metals bull market. We are now seeing all the evidence of another and potentially MUCH bigger loss of complacency. Things may still get worse for the precious metals before they get better. But the facade of the "war on terror" has now collapsed. This is the beginning of the collapse of the facade of "global economic growth through credit creation". Gold has always emerged from such events - there are NO historical exceptions - as the financial asset to which the wise, honest, and TRULY risk averse will repair. It will be no different this time.
Please note that there were new 2007 Gold price highs in ALL the currencies in the table below this week and that all of them reached these highs on the day of the big stock market sell off or on the day before it took place. What happened over the rest of the week was almost inevitable.
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