Deluge
of Financial Calamities Looming by Mid-March By Patrick A. Heller, Market Update
- Numismaster
February 10, 2009
As
horrible as the financial news for currencies and paper assets
has been since mid-2007, it looks like the worst is yet to
come - perhaps as early as next month.
Over the weekend the Managing Director of
the International Monetary Fund (IMF), Dominique Strauss-Kahn,
told a gathering of Southeast Asian central bankers that the
world's advanced economies are already in a depression and
that the financial crisis may deepen unless the banking system
is fixed.
On Febr. 4, Paul Wolfowitz, the former president
of the World Bank, said the IMF and similar institutions are
incapable of coping with the global financial crisis because
they do not have enough resources.
The market appears to have turned on U.S.
Treasury debt. Analyst Adrian Douglas issued a report on Sunday
titled "Bond Market Collapse Unfolding." He used
his proprietary Market Force Analysis on the price of the
10-year U.S. Treasury Note. Last September and October, as
the value of Treasury debt was falling, it looked almost certain
that the U.S. Treasury entered the market to purchase its
own debt! This had the effect of boosting the price of Treasury
bonds.
However, the futures market for 10-year Treasury
debt shows that there have been far more sellers than buyers
for more than the past six months, a strong sign that bond
prices are destined to decline in the near term. For the past
eight weeks, Treasury bond prices have indeed been generally
declining (i.e. interest rates have been rising). The U.S.
government is almost certain to intervene again, as the Treasury
debt is the most important in the world, and whose collapse
could wreak havoc across the global financial system.
The problem is that the U.S. government is
going to have to float massive additional amounts of new Treasury
debt in order to immediately finance the second $350 billion
of the bank bailouts and the nearly trillion dollars for the
new so-called "economic stimulus" program. If almost
everyone else is selling and the U.S. Treasury is the primary
buyer of its own outstanding bonds, who is going to buy the
newly issued debt?
Non-precious metals prices may have also passed
their bottom. The price of copper recently jumped as much
as 10 percent in a single day, for example.
Treasury Secretary Timothy Geithner is so
busy with the crisis over President Obama's "economic
stimulus" program that he announced Monday he would have
to delay dealing with the U.S. banking crisis.
In an interview on www.commodityonline.com
released Monday, Marc Gugeri, the Fund Manager and Advisor
to both Gold 2000 Ltd and the Julius Baer Gold Equity Fund,
was asked about the price of gold. He stated, "The majority
of investors purchase Paper-(Gold)-Futures at the COMEX. The
sellers or counterparties of those Gold-Futures are just a
few dominant players. Some of them have an in-official close
link to the U.S. government. So far most of the investors
didn't exercise the gold futures and have accepted cash instead
of physical settlement. This is about to change. I believe
that the COMEX will default and the entire paper gold market
will 'crash' and gold could rise very quickly to 2,000 [or]
3,000 U.S. dollars. When this happens it will be too late
to exercise or to try purchasing physical gold."
It normally is rare to find such doom-and-gloom
commentary appearing in general financial circles. It is even
more uncommon for commentators to reveal that some of the
dominant players in the gold market have a close link to the
U.S. government or that the price of gold could soon double
or triple. Lately, mainstream financial analysts have been
much more willing to talk about gold, to recommend owning
gold for having better appreciation prospects than other assets,
and to specifically recommend purchasing physical gold rather
than shares in gold exchange traded funds or gold "certificates."
The tide has been turning toward gold for
the past eight years, partly because it has been one of the
top performing of all asset classes. Still, the proportion
of Americans who own gold is minuscule - estimates I have
seen range from only 3-9 percent of all U.S. investors. There
is much more room for future appreciation despite how far
prices have already climbed this decade.
The money supply of all of the world's major
currencies is now increasing by 10-30 percent annually. With
the gold supply increasing by less than 2 percent annually,
it is a virtual certainty that all currencies will fall in
value against gold.
In the past several weeks, several investment
advisors have become more positive about gold because of the
relative strength in the price of silver! In the past, silver
has led the way for higher precious metals prices, which is
just what has been happening so far this year. Late last year,
the gold/silver ratio was over 80. Now it is under 70 and
falling. I like the prospects for both silver and gold (though
I continue to expect silver's price to outperform gold).
Perhaps most telling of all, the February
2009 COMEX gold contract fell into backwardation against the
March 2009 contract on Feb. 6 and again on Feb. 9. Last Friday,
the February contract price closed at $913.90, while the March
contract ended at $913.80. On Monday, the February contract
finished at $892.40, while March closed at $892.30. The last
time that the COMEX gold contract went into backwardation,
where the spot month traded at a higher price than future
months, was in 1980. Being only 10 cents higher and only being
higher then just the following month may not seem significant,
but the fact that this has not occurred since 1980, as the
price of gold exploded, could be the clearest sign that gold
is due for a major rise soon. (For full disclosure, I note
that the less active New York Stock Exchange LIFFE contract
for 100 oz of gold closed Feb. 9 at $892.20 for the February
contract and $892.30 for the March contract.)
In sum, a variety of factors are coming together
very soon that I think will clobber paper asset values even
more than they have suffered in the past 20 months. As these
troubles mount, as the Managing Director of the IMF and the
former president of the World Bank forecast, the prospects
for gold look ever better.
Note: at the huge Long Beach Coin show in
California last week, a lot of rare coin buyers were taking
a wait and see attitude - except for circulated and lower
quality mint state US Double Eagles. Between the start and
the end of the show for instance, the wholesale price of the
Mint State-62 $20 Liberty jumped almost 6%, even as the gold
spot price fell slightly! Supplies of these and other lower-premium
U.S. gold coins were the lowest I have seen in more than 20
years attending this show!