That's about the only source left to tap.
The "Housing Bill" - complete with the bailout provisions for Fannie and Freddie, several items that President Bush has been threatening to veto for years, and a $US 800 Billion increase in the Treasury's "debt limit" - was passed in the US House of Representatives on Wednesday, July 23. Gold fell $US 25.70 on the day, having fallen $US 15.20 on the previous day. Since then, the precious metals have been quiescent, although the oil price resumed its fall on July 25.
Spot future gold reached a post March 2008 intraday high of $US 988.60 on July 15. At its close of $US 926.80 on July 25, Gold is down 6.3 percent. Oil, to which Gold is said to be joined at the hip, reached an all time intraday high of $US 146.60 on July 11. At its close of $US 123.26 on July 25, oil is down 15.9 percent. By this "measurement, Gold has held up very well to the onslaught of a downward spiral in oil. The equivalent "measure" for Silver, by the way, is 9.6 percent.
Thus we have all these "key" commodities reaching recent highs right around the time (July 13) when Mr Paulson was revealing the details of his plan to bail out Fannie and Freddie, the latest and greatest step in the financial establishment's plan to postpone the inevitable by fiddling at the edges. The latest rescue act, however, dwarfs anything which has taken place so far in the ongoing "credit crunch" saga now nearing its first anniversary.
There are no limits put on the US Treasury under this "Housing Bill". They can, if they choose, buy any or all the stock in both Fannie and Freddie. They can inject any amount of "capital" they choose into either or both of these two government "sponsored" (read created) entities. The only implied limit is revealed by the provision in the housing bill to raise the Treasury's debt limit by $US 800 Billion. By the time Mr Bush signs the new $US 10.615 TRILLION debt limit into law along with the housing bill, that same "limit" will have all but doubled over his not yet completed two terms in office.
The Treasury's debt "limit" or "ceiling" has been a bit of a standing joke for decades. It has never put anything but the slightest and shortest-term constraints on Treasury borrowing. The "limit" passed the $US ONE TRILLION level in 1981-82. It is now to be more than $US 10.6 TRILLION, and nobody is game to predict how long THIS "limit" will last.
It will probably last through the coming Presidential elections though and on until the next President is inaugurated in late January 2009. There is no telling what that new President will survey as he looks across the economy and financial system of his nation, but there is NO doubt that it will be worse, almost certainly MUCH worse, than it is today.
Right now, the level of "denial" in the financial press and, it must be said, amongst the public too, is at levels seldom approached. This is true in the US, and it is true almost everywhere else. In the UK, for example, the government has all but admitted they are at the end of their borrowing tether with the estimation that the taxpayers simply won't put up with too much more. In Australia, a recent "survey" of "economists" shows a one in three chance of a recession. This is said in a nation where 1 million households are now officially under "mortgage stress". There are about six million "households" in Australia, of which more than one-third don't carry a mortgage at all. And the chances are one in three that Australia "might" slip into a recession?????
But the inevitable "crunch" can be staved off indefinitely, it is fervently preached, just as long as the governments can go on regulating and just as long as each new spike up in the crisis can be met with a new and more harebrained rescue package. The housing bill will raise global confidence in the US financial system and the US Dollar, Mr Paulson is shouting from the rooftops.
WHY? Like all the other rescue packages which have been swamped by the current crisis, this one does NOTHING WHATSOEVER to address the fundamental issues. There have been two very ominous signs in the immediate aftermath of the House passage of the rescue bill on July 23. On July 24, financial shares on US stock markets had their biggest one-day fall in eight years and US homebuilders shares had their biggest one-day fall ever. On the same day, it was reported that US banks flocked to the Fed to borrow at the highest level ever in the week just ended.
Here is a very cogent quote from Mr Howard Simons, a research analyst with Blanco Research:
"The financial sector, everyone whose business is essentially lending money, is now a ward of the state. They could lend to each other, but they don't trust each other. They can't raise money in the equity market. There is nowhere else to turn."
That is precisely the point. There is now "nowhere else to turn" for the financial system but the supposedly unlimited credit issuing power of the government. It is true that a government can issue any amount of debt paper they choose to. It is NOT true that this debt paper will find a buyer, no matter what. Nor is it true that interest rates will remain unaffected forever. Nor is it true that the currency which all this paper supposedly "backs" is immune from its "value" being savaged.
It is said that there are no strings attached to "manna from heaven". That cannot be said down here on earth.
(Chart appears here in original analysis)
(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 March.
Last week, we had a new entry on the table for the first time since Gold topped the $US 1000 level in March. On July 17, Gold rose to 103233 Yen. That's a new 2008 high for the metal in terms of the Japanese currency. This week, with the big falls on the $US Gold price, the price has dipped back (just) below the 100,000 Yen level.
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