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The Biggest Bailout In History
On Thursday, September 11, 2008, the spot future Comex Gold price hit an intraday low of $US 740.30. Exactly one week later, on Thursday, September 18, 2008, that same (December) Comex spot future Gold price hit an intraday high of $US 921.90. In exactly five trading days, that is an increase of $US 181.60 or 24.53%!. With the exception of the week leading up to Gold's $US 850 high in January 1980, that is the biggest weekly upmove in percentage terms in the post 1971 history of Gold against the US Dollar. Before 1971, of course, the US Dollar was "fixed" to Gold.
In 1980, the US financial establishment had just bitten the bullet. Fed Chairman Paul Volcker had taken his hands OFF the Fed's interest rate controlling mechanism and, to a large extent, left it to the markets to sort out the US financial crisis of the day. This time, things are VERY different. The US Fed and the US Treasury have announced a bailout which even they admit will cost the US taxpayer at least $US 500 Billion. The markets have not been left to "work it out", they have been stomped under the heel of government intervention to an extent which has no precedent or even near precedent in US history.
For the second time in less than three months, the Securities and Exchange Commission (SEC) has imposed a total ban on short sales (naked or otherwise) of financial stocks. This ban is due to "end" on October 2 -unless it doesn't. On top of that, the White House, Fed, Treasury and Congress are set to come up with a financial "entity" which will, literally, take over the worthless mortgages and paper derived from same which are on the verge of sinking the entire US banking and financial system. On top of that, there are plans afoot to bail out US money market funds, many of which are on the verge of collapse and many more of which have recently been subjected to huge demands by investors to remove their cash. On September 10 alone, $US 90 Billion was removed from US money market funds by scared investors.
All this was announced by the full "enchilada". "'America's economy is facing unprecedented challenges. We're responding with unprecedented measures,' Bush declared, standing in the White House Rose Garden with Paulson, Bernanke and Christopher Cox, chairman of the Securities and Exchange Commission."
And yes, there's more. This is an as yet unconfirmed report which appeared on a UK website. The title drips foreboding, to say the least – US Government to secure mortgage market with gold reserves. We quote from this article: "The U.S. Treasury Department has promised “hundreds of billions” to save the US markets using its own gold reserves. President Bush approved the use of existing authorities by Treasury secretary Hank Paulson to make available as necessary the assets of the Exchange Stabilisation Fund for up to $50 billion to buy more illiquid mortgage assets."
There is only one thing wrong with this report. While the Exchange Stabilisation Fund (ESF) was set up in the early 1930s using the paper "profits" made by the Treasury when President Roosevelt devalued the US Dollar from $US 20.67 to $US 35.00 per ounce of Gold, the "requirement" for the ESF to hold Gold was negated when President Nixon divorced the US Dollar from Gold in August 1971. At present, the ESF accounts show a holding of just under $US 50 Billion - a derisory sum in present circumstances. Not one penny of this amount is held in Gold.
What we have here, in sum, is a frantic attempt by the political and financial "powers that be" in the US to stabilise their financial system in the only way they deem acceptable. They are simply throwing more "money" at it in the hope that some of it will come out the other side in the form of new lending and borrowing. And the US authorities are not alone. Over the past week, central banks worldwide have "injected" amounts estimated at anywhere between $US 450-700 Billion into the global financial system.
The result - this week - has been the wildest ride seen so far during the credit crisis on global markets of all descriptions. As only one example, consider the table below. As you know by now, the surge on global stock markets on September 19 in reaction to the bailout plan announced by Mr Bush and Mr Paulson has been all but unprecedented in market history. Several global markets, including the FTSE in the UK, saw their biggest percentage rises ever on the day. But even with those rises, the vast majority of global stock markets actually ended the week DOWN!
Market On The Day
Sept 19 On The Week
Sept 12-19
Aust. All Ords +4.06% -2.36%
Japan Nikkei +3.76% -2.36%
Shanghai +9.46% -2.36%
Hong Kong +9.61% -0.13%
London FTSE +8.84% -1.94%
German Dax +5.56% -0.73%
Swiss Mkt +6.07% -2.63%
Dow Jones +3.35% -0.28%
S&P 500 +4.03% +0.32%
Canada TSX +7.03% +0.12%
$US Gold -3.60% +13.11%
$US Silver -1.74% +15.75%
And if these figures are not fantastic enough, consider the week on the US Treasuries markets. Last Friday (September 12), the yield on three-month US Treasury notes was 1.49 percent. Three trading days later, on Wednesday, September 17, that yield had dropped to - are you sitting down? - 0.03 percent. This is surely the lowest yield in the history of the series. Two days after that, after the huge bounce on US stock markets, the yield on the three-month bill had rebounded to 0.93 percent. On September 19 alone, the three-month note yield soared from 0.07 percent to 0.93 percent.
This is not government "finance" in any sane definition of the word. These are the frantic gyrations of a credit system gone completely haywire. The precious metals price leaps confirm it.
$US 5 x 5 Gold Point And Figure Chart - Closing Prices - Since 1974
As you can see, the price action on this chart has now taken Gold well below the uptrend line which has supported the entire bull market from 2002 to date. We also have descending lows on the chart - the $US 1000 high set in March and the $US 975 high set in mid July. Gold slid all the way down to the $US 750 level on this chart just last week. And now has come the HUGE rebound. At its close above $US 895 on September 18, the price action on this chart had once more climbed well above the uptrend line. The correction on September 19 has brought the price action back to the line, but still above it.
We began the table below in 2007 and have extended it into 2008, even though Gold in all four currencies in the table remain well above their 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.
Only six weeks ago, 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 was a new 2008 high for the metal in terms of the Japanese currency. Then the Fannie/Freddie bailout plan went to work. Now, we have an even bigger bailout. And this week, the Aussie Dollar Gold price hit a new 2008 and ALL TIME high.
Gold In Four Major Currencies Since The 2006 High On the $US 5 x 5 P&F chart (see above), the May 2006 high is VERY significant.
It led to the correction which anchors the uptrend line on the chart.
Currency 2006 High Date 2008 High Date Up/Down Percent
US Dollar 721.50 May 11 1004.30 March 18 +282.80 +39.20%
Euro 560.20 May 11 647.90 March 3 +87.70 +15.66%
Aus. Dollar 928.60 May 11 1131.00 Sept 18 +202.40 +21.80%
Jap. Yen 79285 May 11 103233 July 17 +23948 +30.20%
©2008 The Privateer Market Letter
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