Peter Schiff makes a very salient point in his April 4 article - "The Assault On Free Markets" - at 321 Gold. We quote:
"While Bernanke talked about the underlying strength of our economy, he claimed necessity in saving Bear Stearns from bankruptcy as it would have brought down our entire financial system. How sound can our economy be if the failure of one investment bank could topple it?"
(emphasis by The Privateer)
Indeed!
A cursory glance at the machinations of any Fed Chairman and Board of Governors in the not so august history of that institution should make it clear that they have only one over-riding purpose. That is, quite simply, to make sure of the continued functioning of the financial system over which they preside. While the word "moral" forms no part in either their deliberations or their actions, the word "hazard" certainly does. Anything which is "hazardous" to the system is met with every weapon at their command, and their weapons are formidable.
In fact, their weapons are so formidable that they have been able to perpetuate a financial system built on a completely fiat currency having no direct or even indirect connection to the real economy on a global basis for nearly four decades. This is a considerable feat. It has often been tried in history by a nation or even a group of nations. It has always failed. But before 1971, there was never a time in history when the whole world "went off Gold". Nearly four decades of purely paper money has required an abysmal ignorance about the nature of money by the vast majority of people. That has certainly been achieved. It has also required the construction of a monumental structure of debt paper piled on debt paper. That has also been achieved. But in the process, the system has now been stretched to the point where, to quote Mr Schiff again: "...the failure of one investment bank could topple it.
In the case of the UK, that one bank was Northern Rock late last year. The "solution" was to nationalise the bank, in the process adding the sum of 100 Billion Pounds to the debt of the British government. In the case of Bear Stearns, which is not really a "bank" at all but an investment or brokerage house, the lead up was very similar. Right up until the last minute, Bear Stearns, the SEC, and the government regulators right up to the Fed itself gave no hint that there was a problem. Then, when the problem exploded on the markets and the system, the Fed instantly arranged a takeover backed with government guarantees. No, they didn't nationalise the bank, they merely "pursuaded" JP Morgan to take it over by guaranteeing to make good any "losses" which might arise. Nobody makes any "bones" about this. The CEO of JP Morgan, Mr Jamie Dimon, testified to Congress that his bank would not have agreed to "buy" Bear Stearns without Fed "support" for the deal.
The situation has become so acute that practices that the most agressive "bucket shop" brokerage house of the 1920s boom would not have dreamed of implementing are now being used as a matter of course by the Fed. They have no choice, according to Mr Bernanke's Congressional testimony. They can't stand idly by and watch the "system" collapse, can they?
It has been less than three weeks since the Bear Stearns rescue. It has been less than a week since Treasury Secretary Paulson's speech outlining a "revamping" of the regulatory mechanism which oversees the system. It has been reported that Fed "officials" are now studying the mechanisms by which the Scandinavian nations all but nationalised their entire banking systems in their financial crisis of the early 1990s. The very scale of the reaction of US monetary authorities is in itself proof positive of the dimensions of the danger which the system is facing.
Six months ago, Mr Bernanke was telling us that the Fed would take all the steps necessary to prevent the "problem" in the financial system from having an effect on the "real economy". Today, the real economy of the US is imploding. On a global scale, "real economies" have reached the state where food riots and hoarding are sweeping across Africa, the Middle East, and Asia because of the skyrocketing prices of staples like wheat, corn, and especially rice.
The more strenuous the efforts become to perpetuate the fatally flawed financial system, the greater the strains on the "real economy" will become. The greater those strains become, the higher the potential for a huge backlash against the financial system and those who direct it becomes. In the nations where food is becoming increasingly unaffordable, this is already happening. In the US, the first signs are emerging. In a recent poll, 78 percent of respondents said the US is worse off now than it was five years ago. Now, even a majority of those polled are becoming angry at the Fed's neglect of the US Dollar through their rate lowerings and incensed at the bank and brokerage bailouts.
And finally, the other BIG indicator of the severity of the current situation is Gold's reversion to "reverse barometer" status since it hit the $US 1000 level in mid March. Take a look at the chart below. That's a solid "bounce" off the $US 1000 level, isn't it. Gold is the asset held by people who are aware of the TRUE state of the global financial system. It is the asset which is OUTSIDE that system.
We quote from the introduction to Gold This Week: "The global paper currency system is very young. It depends for its continued functioning on the BELIEF that the debt upon which it is based will, someday, be repaid."
Today, the only debt paper which still clings to that belief is debt paper either issued or "guaranteed" by government. The problem is that the only means that government has of "honouring" those guarantees are the future earnings of their citizens. Sooner or later, that fact always dawns on the citizenry. The glimmers are starting to emerge now.
In the meantime, the situation will remain "Damn The Economy - Full Speed Ahead" - and Gold will probably remain under its mid March highs. How long is the "meantime"? There's no way of knowing. Just watch the rate which the real economy implodes. The faster that goes, the harder it is going to be to "dissuade" people from putting at least some of their remaining wealth outside the financial system.
On March 17, we added the $US 1000 "X" to this chart - and that is as far as Gold got. As you can see, Gold has descended in two large "spurts" since then, the most recent taking it all the way down below the $US 885 level by the start of this week. By the end of the week on April 4, Gold had clawed its way back to $US 909. An upturn on this chart requires a spot future close of $US 910 or higher.
(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 at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold improved upon those January levels in all four currencies as spot future Gold closed above the $US 1000 level for the first time ever in the middle of the month. But then came the big Gold sell-off and the - so far pretty anaemic - "recovery" of the US Dollar.
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