Patrick A. Heller
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 http://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 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.