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Nationalisation of Fannie and Freddie is Bearish for US Dollar, US Stocks and Economy

Commodities / Gold & Silver Sep 08, 2008 - 12:37 PM GMT

By: Mark_OByrne

Commodities Gold surged at the open in Asia with news of the de facto nationalisation of the US' mortgage giants in what amounts to the largest bailout in world financial history. It has since given up some of these gains in early trading in Europe due to more counter intuitive dollar strength which looks increasingly overbought.


Gold and silver remain very oversold, especially after last week's fall in prices – gold by some 3% and silver by more than 9%. Both are now  screaming buys on value terms. Silver particularly so - however it has suffered significant damage technically and may fall further in the short term. The gold to silver ratio has risen sharply and is now at extremely high levels ( $808.00/$12.38=65.26 ). Thus investors can now buy 65 ounces of silver with every one ounce of gold which is leading to a continuation in very robust and unprecedented investment demand for silver.

With no end in sight to the U.S. housing crash and indeed signs that it is now impacting the rest of the U.S. economy, the unprecedented safe haven demand for gold seen in recent months will likely continue for the foreseeable future.

Chart: Gold/Silver Ratio

Gold/Silver Ratio

Nationalisation of Fannie and Freddie is Bearish for US Dollar, US Stocks and Economy
The de facto nationalisation of the mortgage giants has been greeted by markets in another bout of care free irrational exuberance. The usual suspects and happy clappy cheerleaders would have us believe that “happy days are here again”.

Nothing could be further from the truth.

The nationalization is the largest bailout in financial history and is taking  “moral hazard” to a new unprecedented level. While the move has made Fannie and Freddie credit standing good again and eliminated the risk of default, it has increased the sovereign risk posed by the U.S. government itself given the monumental size of the debt being assumed.

The liabilities are in excess of $5,400 billion.

The nationalization of Fannie Mae and Freddie Mac shows that the U.S. is "more communist than China right now" but its brand of socialism is meant only for the rich, investor Jim Rogers, CEO of Rogers Holdings, told CNBC Europe on Monday.

"America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich… it's just bailing out financial institutions," Rogers said. "This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents. I'm not quite sure why I or anybody else should be paying for this," Rogers told "Squawk Box Europe."

By adding an estimated minimum of $800 billion to the already surging $9.67 trillion in national debt, this bailout could raise America's national debt to $10.5 trillion - 75% of GDP.

And this comes at a time of already near record U.S. trade and current account deficits and sharply rising budget deficits. The federal deficit this year will run to some $400 billion, and next year's red ink is likely to hit a half trillion dollars.

U.S. creditors in China, Japan, the Middle East and importantly Russia are already cutting back on their purchases of US debt instruments and should they become sellers we will see US treasuries fall in value with a corresponding increase in yields. The last thing an already struggling U.S. economy could afford right now.

All of this could lead to a monetary crisis in the global reserve currency in the coming months. Thus, we are very likely witnessing a dead cat bounce in the dollar versus a number of other fastly deteriorating fiat currencies such as sterling and the euro.

Today's Data and Influence
This week sees the release of a number of data reports that should help set the tone, though moves in the dollar and oil are likely to continue to influence direction.

Gold and Silver
Gold is trading at $809.60/810.10 per ounce (1245 GMT).
Silver is trading at $12.93/12.99 per ounce (1245 GMT).

PGMs
Platinum is trading at $1379/1389 per ounce (1245 GMT).
Palladium is trading at $270/276 per ounce (1245 GMT).

By Mark O'Byrne, Executive Director

Gold Investments
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Gold and Silver Investments Limited
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EC3V 3ND
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Email info@www.goldassets.co.uk
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Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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Gold and Silver Investments Limited hope to inform our clientele of important financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth.
We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles savings, investments and livelihoods. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth.

Financial Regulation: Gold & Silver Investments Limited trading as Gold Investments is regulated by the Financial Regulator as a multi-agency intermediary. Our Financial Regulator Reference Number is 39656. Gold Investments is registered in the Companies Registration Office under Company number 377252 . Registered for VAT under number 6397252A . Codes of Conduct are imposed by the Financial Regulator and can be accessed at www.financialregulator.ie or from the Financial Regulator at PO Box 9138, College Green, Dublin 2, Ireland. Property, Commodities and Precious Metals are not regulated by the Financial Regulator

Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

Mark O'Byrne Archive

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