J. S. Kim
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The inconvenient truth of the U.S. economy has created one of the best buying opportunities for gold and silver bullion and associated stocks of this entire bull run right now. Anyone that believes that this U.S. dollar rally is sustainable will be in for a huge shock in the coming year. Sure, like many of us who still believe the current bull in gold and silver is intact despite the shocking recent selloff, the steepness of the sell off was still surprising to most of us. Once the all important $850 resistance line for gold was broken, I believed that $825 or so would mark the bottom of this current correction, but gold continued to fall further, shockingly breaching the $800 barrier. In fact, its monumental decline has spurred major media outlets to report the end of the gold bull and commodities bull. I am going to dispute that because certain behavior I track at the largest financial institutions in the world tell me that gold and silver’s downside has now become extremely limited and that a strong rally is now on the horizon.
Many people believe that it’s a sucker’s bet to try to call the bottom of a correction just as it is to try to predict how high prices will rise during a rally. And for the most part, calling a bottom is still impossible. Still, there are undeniably positive developments in the gold and silver bullion markets that happened a week ago. I’ll need to see confirmation of this behavior over the next couple of weeks to know for sure, but as odd as it may seem to call for the end of declines now with pessimism at an all time high, the pieces of the puzzle are in place for gold and silver now, as of August 18th, to rally strongly from this point forward until the end of the year.
To refresh your memory regarding the grave risk still inherent in our financial system, I’ve posted commentary from the former nation’s top accountant, Chief Comptroller David Walker of the Government Accountability Office below:
Though Mr. Walker made these statements several months ago, they are still relevant today, though nobody seems to care much about his comments. Although it is truly amazing that people still listen to and place faith in the comments made by the top U.S. financial leaders, let’s review the reasons for my disbelief in their words:
In March of 2007, U.S. Secretary of Treasury Hank Paulson stated that the subprime crisis was “largely contained”. In an effort to build consensus among those the public views as experts, U.S. Federal Reserve Chairman Ben Bernanke echoed Paulson’s statements: “”At this juncture, the impact on the broader economy and financial markets of the problems in the sub-prime market seems likely to be contained.”
Of course, given the high levels of access to information that Paulson and Bernanke possess, the above two statements were largely designed to prop up consumer confidence in the U.S. economy and the stock market despite grave risks that continued to persist in the U.S. economy that had neither been addressed nor resolved.
Late in 2007, U.S. President Bush himself contributed his thoughts by stating: “The government’s got a role to play, but it is limited,” Bush said at the White House. “A federal bailout of lenders would only encourage a recurrence of the problem.” U.S. Federal Reserve Chairman Ben Bernanke assured the public of the same: “It is not the responsibility of the Federal Reserve—nor would it be appropriate—to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.”
A year later, the second round of confidence-building statements arrived:
“IMF Chief Says Worst of Financial Crisis is Over”
“Paulson Says Worst of Financial Crisis is Over”
“Citigroup Chief Says Worst of Credit Crunch Crisis is Over”
“Financial Crisis Mostly Over, [JP Morgan CEO] Dimon Says”
Wall Street: The Anti-Robin Hood
Despite Bernanke’s promise to not act improperly “to protect lenders and investors from the consequences of their financial decisions” (which really could be re-worded to read “to protect Wall Street and banking executives from the consequences of their financial decisions”), Bernanke, Paulson and the SEC did exactly what they promised not to do. In 2008, they bailed out Bear Stearns, Fannie Mae (FNM) and Freddie Mac (FRE), actions designed to protect the salaries of the executives at these firms while pinning the entire bill for the folly of their losses on American taxpayers. People mistakenly empathize with these solutions because of the way the financial sector spins these stories. First of all, they spin every bailout as necessary for the “good of all Americans” when nothing could be further from the truth. The bailouts of these three institutions, in reality, will cost every American taxpayer thousands upon thousands of dollars while they preserve the income of the executives that created the problems. And these were largely problems that could have been avoided and prevented.
For example, the New York Times reported that Freddie Mac Risk Officer David Andrukonis warned CEO Richard Syron FOUR years ago in mid-2004 that the company’s practice of buying bad loans “would likely pose an enormous financial and reputational risk to the company and the country.” Yet, in the pursuit of profits, Syron chose to ignore Andrukonis’s warnings, and chose to ignore them for four years.
Banking Sector Information Today is Fantasy Driven and Devoid of Reality
The U.S. banking industry is a total fantasyland today, with almost every major bank engaging in one or multiple of the following actions:
- Holding Level 3 assets (those assets that are difficult to value due to illiquid markets) at some fantasy land valuation assigned to them by banking management;
- Hiding risky assets off-balance sheet;
- Changing bad-debt definitions to delay write-offs; and
- Delaying re-sets of subprime mortgages that will eventually go into foreclosure.
Currently, the FDIC has 90+ banks in the U.S. on their “watch list” for risk of failure. How large this list really should be is anyone’s guess.
I know that people generally hate to read terrible outlooks and would much rather believe that the gold and silver bull are dead, that the U.S. dollar is on its way back, that U.S. financial companies are robust and that the U.S. economy is fine. Even those who reluctantly acknowledge the problems when a non-partisan individual such as former GAO Chief Comptroller David Walker illuminates them still often insist that the U.S. Federal Reserve can inflate their way out of the problem. In the past, papering over a problem has always been the solution. Housing market down? No problem, slash interest rates, create easy money and prop the housing market back up. Stock market down? No problem, slash interest rates and prop the stock market back up. The only problem is that propping up markets against the will of a free market always create massive bubbles that eventually burst.
U.S. Secretary of Treasury Hank Paulson has already stated that he will not return as Secretary of Treasury no matter who wins the U.S. Presidential elections in November. Most likely his reason for giving such an early resignation is the one thing that gnaws at him day and night – the inconvenient truth about the U.S. economy.
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This article has 8 comments:
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John Walter
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7 Comments
Aug 21 10:20 PM-
J.S.
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18 Comments
My Website
Aug 22 12:05 AMIn response to your question, inflation is a problem all over the world now. Inflation is raging in the UK, Spain and other EU countries as well. This means the BOE and the ECB are massively inflating the Euro and Pound as well. In some ways, although the Euro is stronger that the dollar, the Euro in theory is even worse than the dollar because the EU is still a conglomeration of sovereign states all with separate agendas to protect their own sovereign economies. So I really do not like any paper currencies at this point until I see central banks take appropriate action to address the problem, not just "talk" about hawkish policies.
Furthermore, this a serious disconnect between the prices of gold and silver established in the futures markets where it is extremely rare for any physical gold or silver to ever change hands versus the physical silver and gold market where real coins and bars change hands. This points to the fact that the prices established in early August in the futures markets for silver and gold were fantasyland prices not reflective of macroeconomic conditions (too much to go into here, but there was a reason Wall Street wanted to push down prices in the futures markets so much and why an unprecedented severe disconnect formed between futures markets that trade "paper" gold and silver and physical markets that trade REAL gold and silver. Nonetheless, it has given rise to great opportunity. By the way I posted that article on August 12th on my blog though it didn't make it to the Seeking Alpha site until yesterday. All the best JW and hope that helps.
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cyclops2020
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15 Comments
Aug 22 08:57 AMCurrently, the FDIC has 90+ banks in the U.S. on their “watch list” for risk of failure. How large this list really should be is anyone’s guess.
P.S. ...and IndyMac wasn't even on the list !!
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Kelly Lieberman
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241 Comments
My Website
Aug 22 09:38 AMTheir indusrialized country is polluted to the point that if they don't shut down and rebuild it "green" their life won't be worth living there. This may be their way to pay for a complete overhaul of the modernization of their infrastructure....
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David Martin
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91 Comments
Aug 22 09:39 AMBernanke clearly knew that public money was being used in a highly speculative manner, andx misrepresented this fact.
Prosecutions should be a priority of the next administration.
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silveraxis
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63 Comments
My Website
Aug 22 04:39 PM-
silveraxis
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63 Comments
My Website
Aug 22 04:46 PMDuring a monetary crisis, liquidity tends to drain toward the inverted bottom of Exter's pyramid, which is where gold resides. In other words, gold is likely to receive a disproportionate share of monetary fund flows. This effect is very insidious and can become deeply ingrained, with the extreme example being that funds meant for paying off debt are used instead to buy gold since the players know the debt will be eventually inflated away. These players are so far playing nice because it is not necessarily in their best interest to see the monetary regime fail, but they will do what they must to survive when push comes to shove.
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silveraxis
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63 Comments
My Website
Aug 22 04:52 PMBack in the mid-1990s, Greenspan warned these players when he stated that the central banks stand ready to lease gold should it be required. The conspiracy crowd took this to mean that the central banks had already leased gold in pursuit of their aims, but I don't see where that has been necessary. Greenspan's words were merely a warning and a reminder to the players that central banks hold so much gold that it would be impossible for the players to inflate debts away without central bank cooperation. Well, I believe we will get central bank cooperation at some point given that the alternative is unthinkable.