In that very old homily, the blank in that statement was filled in by the word "God". The implication, of course, was that we don't trust anybody (except maybe George Burns). In the days of the re-emergence of the precious metals as an "investment alternative" in the 1970s, many filled in the blank with the word "Gold". But our era, the great credit financed financial cornucopia of the period since 1982, has been one in which that fine old credo was sadly neglected. The world became very trusting indeed. Almost anything could be, and was, held to be an entirely predictable, trustworthy and unfailing way to riches. And the more leveraged, manipulated, mysterious and esoteric it was, the more the trusting fell all over themselves to obtain it.
Now, in an atmosphere of incipient panic undreamed of as recently as mid 2007, they are falling all over themselves to get rid of it. Or they are refusing to make a market in it. Or they are "regretfully taking the paper there is no market for back onto their books and announcing gigantic "write-downs" (AKA - LOSSES).
This week, another "tranche" of the paper snowstorm concocted on Wall Street to keep the "perpetual" credit expansion expanding has bitten the dust. We refer to the "auction rate securities". All of a sudden, these "assets" have been frozen by most of the major New York money-centre banks. The "auction rate securities" were just another form of debt paper, these ones designed to magically convert what were mostly long-term loans into "cash substitutes". Auctions were held on a regular basis (usually weekly) at which the rates being paid on this paper could be paid and/or holders of the paper could sell it, for cash.
But now, none of this is happening because the auctions are NOT being held. And so the "credit crunch" has chewed up yet another source of "finance", this one being the one where US municipalities and tax-exempt institutions were used to raising capital. The crunch came when the Port Authority of New York and New Jersey watched the yield on some "auction-rate" paper they had just issued soar from just over 4 percent to 20 percent. By the end of the week, almost 1000, regularly scheduled "auctions" had failed. And now, owners of this paper, marketed to them as a "cash substitute", cannot sell them at all.
We won't go into a litany here of the varying kinds of debt paper and the derivatives of same which have either ceased to be marketed at all or which can now only be sold at HUGE risk premiums. While the financial media are still obsessed with the "subprime" paper, there is hardly a category of debt-backed financial paper left on Wall Street which has yet to be affected.
Well, there is one. It has not yet affected the markets for "Treasury" (or its equvalent in most other nations) debt paper. That one is still waiting in the wings.
Even more ominously, the more outrageous the announced plans for "stimulating" the system become and the faster they proliferate, the deeper the "freeze" on the debt paper becomes. On February 15 an "Op Ed" piece appeared in the New York Times written by Paul Krugman with the title" "A Crisis Of Faith. Here is a short quote: "More important, however, is the way the ever-widening financial crisis has shaken investors' faith in the whole system. People no longer trust assurances that fancy financial instruments will function the way they're supposed to."
If that is indeed the case, then all we can say is that it's about time.
To return to the headline with which we begain this week's analysis, more and more people are finding out that they cannot "pay cash" because what they thought was as good as cash is in fact just one more piece of paper concocted by Wall Street. And now Wall Street won't give them any "cash" for it. As the alternatives to "cash" in the global financial system continue to dwindle by the week, the strain on the system increases. And what of the "cash" itself? It is important to remember when that old saw about "cash" was first constructed, cash was Gold itself or a claim to Gold held in the Treasury. Sadly, that's not the case today.
This week, Gold has reverted to its "seasonal" action - see the February 8 "Gold Bull Market" for an explanation. It is now tracing out another trading range, this one in between about $US 885 and $US 930. Please note that this range is above the old 1980 all time highs.
The $US 5 x 5 Gold Point And Figure Chart
The $US 19 fall to $US 885.90 on February 5 turned the chart down. Gold turned right there and rose $US 32.50 in three trading days. That culminated in a $US 12.30 rise to a Gold spot future close of $US 918.40 on Friday, February 9. And that turned this chart right back up again. The spot future close of $US 902.80 on February 15 is not enough to turn the chart down again. For that, a spot future close of $US 895 or lower is necessary.
(Chart appears here in original analysis.)
We have extended the table below into 2008, even though Gold in all four currencies in the table is now well above its 2006 highs. Gold breaking out to new all time highs in $US terms three weeks ago led to bull market highs in all four currencies. That was repeated when Gold hit another all time high in $US terms on Monday, January 28. Since then, Gold has quickly traced out a trading range (see above) in $US terms. As was the case last week, the only new high on Gold for the week is the one in Euro terms set on February 11.
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