Here's a quote from a July 27 article in Bloomberg titled: Global Corporate Bond Risk Soars as Investors Seek Safety
"July 27 (Bloomberg) -- The risk of owning Japanese corporate bonds soared to the highest in more than two years as investors around the world fled high-risk debt assets for safer government securities, according to credit-default swap traders.
You can substitute any major nation in the world in the phrase "Japanese corporate bonds", the story just happened to be sourced from Tokyo. The thrust of the article, and the fix the paper money world has gotten itself into, is encapsulated in the title of the article.
Now, allow us to quote a paragraph from what we had to say here last week:
The subprime fiasco in the US, and its mirror images which are now popping up all over the world - notably in the UK and in Australia - has done something that most insititutional borrowers had forgotten was even possible to occur. For the first time in over a decade, it has made lenders rediscover the concept of "risk". It has made them look a LOT more closely at the borrowers and the purposes for which the funds are being borrowed. Having done that, the lenders, again starting in the US, are beginning to demand higher compensation (i.e. interest rates) for the risk they are taking. In a yet small but growing number of instances, the potential lenders have actually refused to lend at ANY interest rate.
As you probably remember, the Dow hit the 14000 level - exactly - just over a week ago on July 19. Six trading days later, it has lost 735 points or 5.25 percent. On July 27 alone, most of the large Asian markets, with the notable exception of China, lost between 2.5 and 4.5 percent on the day. And since the S&P 500 index closed at an all time high of 1553 on July 19, it has lost 80 points or 5.43 percent. The score for the Nasdaq is 158 points or 5.81 percent. Gold is of course down too. It lost $US 24.70 or 3.61 percent over the three days to July 27.
As the Bloomberg headline which is quoted above says, global investors are seeking (what they perceive to be) "safety". That means that they are getting out of markets which are perceived to be unsafe, an out of markets which are easy to exit, and going into markets where they think their capital is "safe" while still earning a rate of return. Very few are stashing CASH (or physical Gold or Silver) under the mattress yet. They cannot afford to, they don't pay a rate of interest.
The business of funding economic "growth" with ever larger tranches of every riskier debt came to a crashing halt this week. It is too early to say how quickly this is going to worsen or how bad it is going to get on the paper money markets, but the ramping up of risk aversion has taken a quantum leap in the past three trading days. The problem, the insoluble problem, the problem which has always been there but is only now just starting to be faced, is that modern economic "growth" depends on easy and "cheap" borrowing.
This week, Gold (and Silver) have been caught up in the rush to "get liquid". As the HUGE daily trade on the Comex (see the data above) shows, it has also been pounded down by main force by money manipulators desperate to make sure that the rush into government bonds this week had no competition.
The other signal feature of the week's trading was, of course, the $US Index (USDX) dip below the crucial 80.00 level. On July 24, the spot future USDX closed at 79.93 - with Gold closing at $US 684.80 on the day. Three days later, the USDX closed at 80.81 and Gold had plunged to $US 660.10. It is a SIGNAL feature of the past week's trading that all the big US and global stock market falls came on the three days after this breaching of the 80 level on the USDX, and while the index was recovering. It is a safe bet that part of the big falls on European and Asian stock markets towards the end of the week was on capital repatriation by US investors.
So, another brick has fallen out of the paper money wall this week. All of a sudden, the risk aversion that everybody hoped could be confined to the subprime sector of the debt markets has spread like a deadly virus right across the corporate debt structure. From here, it is a small step to the banking structure itself. And from there, another comparatively small step to the point where government debt paper comes under duress. This was the progress over the decade of the "inflationary 1970s". Today, we have three more decades to contend with at levels of inflation (an increase in the total stock of money) which leave those which occurred in the 1970s for dead.
The NEXT stage in this debt aversion contagion is when the "safety" of government debt paper comes into question. Gold has sold off this week, partially as a knee-jerk flight into "liquidity" (the "liquidity" of paper IOUs) and partially in an orchestrated effort to debunk any alternative to the "liquidity" of paper IOUs. That always happens in the initial stages of a mistaken "flight to quality". Later, a realisation dawns as to where the real financial "quality" is. There's no way of knowing how long that will take, but THAT'S when the flight to liquidity becomes a flight to Gold - and REAL goods.
$US 5 x 5 Gold Point And Figure Chart:
When Gold closed above the $US 670 level - at $US 673.70 on July 18, this chart turned UP again. It then rose to $US 680 on July 19. Gold's present level of $US 660.10 is not enough to cause a downturn on this chart. For that we need a spot future close of $US 655 or lower.
Please note the new all time high in the Yen Gold price set on July 20
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