Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Canadian Cannabis Stocks CRASH as Canopy Growth Hits a Dead End - 14th Dec 19
Retail Sector Isn’t Dead, and These 6% Dividend Paying Stocks Prove It - 14th Dec 19
Top 5 Ways to Add Value to Your Home - 14th Dec 19
Beware Gold Stocks Downside - 13th Dec 19
Fed Says No Interest Rate Hikes In 2020. What About Gold? - 13th Dec 19
The ABC’s of Fiat Money - 13th Dec 19
Why Jo Swinson and the Lib Dems LOST Seats General Election 2019 - Sheffiled Hallam Result - 13th Dec 19
UK General Election 2019 BBC Exit Poll Forecast Accuracy Analysis - 12th Dec 19
Technical Analysis Update: Tadawul All Share Index (TASI) - Saudi Arabia ETF (KSA) - 12th Dec 19
Silver Miners Pinpoint the Precious Metals’ Outlook - 12th Dec 19
How Google Has Become the Worlds Biggest Travel Company - 12th Dec 19
UK Election Seats Forecasts - Tories 326, Labour 241, SNP 40, Lib Dems 17 - 12th Dec 19
UK General Election 2019 Final Seats Per Party Forecast - 12th Dec 19
What UK CPI, RPI INFLATION Forecasts for General Election Result 2019 - 11th Dec 19
Gold ETF Holdings Surge… But Do They Actually Hold Gold? - 11th Dec 19
Gold, Silver Reversals, Lower Prices and Our Precious Profits - 11th Dec 19
Opinion Pollsters, YouGov MRP General Election 2019 Result Seats Forecast - 11th Dec 19
UK General Election Tory and Labour Marginal Seats Analysis, Implied Forecast 2019 - 11th Dec 19
UK General Election 2019 - Tory Seats Forecast Based on GDP Growth - 11th Dec 19
YouGov's MRP Poll Final Tory Seats Forecast Revised Down From 359 to 338, Possibly Lower? - 10th Dec 19
What UK Economy (Average Earnings) Predicts for General Election Results 2019 - 10th Dec 19
Labour vs Tory Manifesto's UK General Election Parliamentary Seats Forecast 2019 - 10th Dec 19
Lumber is about to rally and how to play it with this ETF - 10th Dec 19
Social Mood and Leaders Impact on General Election Forecast 2019 - 9th Dec 19
Long-term Potential for Gold Remains Strong! - 9th Dec 19
Stock and Financial Markets Review - 9th Dec 19
Labour / Tory Manifesto's Impact on UK General Election Seats Forecast 2019 - 9th Dec 19
Tory Seats Forecast 2019 General Election Based on UK House Prices Momentum Analysis - 9th Dec 19
Top Tory Marginal Seats at Risk of Loss to Labour and Lib Dems - Election 2019 - 9th Dec 19
UK House Prices Momentum Tory Seats Forecast General Election 2019 - 8th Dec 19
Why Labour is Set to Lose Sheffield Seats at General Election 2019 - 8th Dec 19
Gold and Silver Opportunity Here Is As Good As It Gets - 8th Dec 19
High Yield Bond and Transports Signal Gold Buy Signal - 8th Dec 19
Gold & Silver Stocks Belie CoT Caution - 8th Dec 19
Will Labour Government Spending Bankrupt Britain? UK Debt and Deficits - 7th Dec 19
Lib Dem Fake Tory Election Leaflets - Sheffield Hallam General Election 2019 - 7th Dec 19
You Should Be Buying Gold Stocks Now - 6th Dec 19
The End of Apple Has Begun - 6th Dec 19
How Much Crude Oil Do You Unknowingly Eat? - 6th Dec 19
Labour vs Tory Manifesto Voter Bribes Impact on UK General Election Forecast - 6th Dec 19
Gold Price Forecast – Has the Recovery Finished? - 6th Dec 19
Precious Metals Ratio Charts - 6th Dec 19
Climate Emergency vs Labour Tree Felling Councils Reality - Sheffield General Election 2019 - 6th Dec 19
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19

Market Oracle FREE Newsletter

UK General Election Forecast 2019

Paulson's Bailout Package Impact on Gold and US Dollar

Commodities / Gold & Silver Sep 25, 2008 - 07:06 PM GMT

By: Julian_DW_Phillips

Commodities

Global background on the gold and silver markets

  • The U.S. $ rose from $1.60 to $1.39 to the € in the recent rally against the €, and is currently standing at $1.47. Most of the fall of the $ was seen as an effect of the Wall Street investment banks implosion that occurred at the end of last week. The Treasury Secretary of the U.S.A., Hank Paulson, has put together a package that is likely to be passed by the U.S. Congress by the end of this week. Paulson hopes that by buying $ 700+ billion in ‘toxic debt' from the Balance Sheets of the U.S. banking system and placing it on the shoulders of the U.S. Federal Reserve, they will remove the threat posed to the entire U.S. financial system. In the process, the Fed is exponentially increasing its own balance sheet to accommodate the move. Will this convince foreigners responsible for the exchange rate of the U.S. $?

  • On the $ front, the broad expansion of the Fed's Balance sheet is raising questions among foreign $ surplus holders. To date we have seen Russia and Korea selling their $ holdings as fast as possible reflecting their own opinion of the U.S. $. There is no doubt that other surplus holders may also feel the same way but have found themselves trapped by the huge $ holdings they have at present time. However, in view of the catastrophic events in the U.S. financial system, it is decision time even for these nations.
  • Within the U.S. there is hope that this will allow the banking system to renew the easy flow of liquidity to the system and allow it to ‘get back to normal'. But will such hope in a rise in liquidity reassure foreigners of the soundness of the U.S. system and in turn safeguard the $?
  • Part of the increased pressure on ‘short sellers' has been increased margin calls in the gold and silver markets. This increased cost of ‘shorting' is discouraging the continued holding of short positions as well as new short positioning. With the huge level of ‘naked short' positions built up over the last few weeks, there is now speculative upward pressure on the gold price too. Now add to this the leap in investment demand for gold and silver in the last week, and you have them both looking towards higher prices still.

With gold moving in the opposite direction of the $ and all other paper currencies now , what effect will it have on gold and silver prices?

Global perspective

Attention of the U.S. financial problem is focused on internal solutions with little attention being paid to the position of the $ in the rescue formula. After all, it is against the $ and its global place that gold and silver have moved inversely for the last year and more. The decline in confidence, by foreign $ holders, in the U.S. financial system has been dramatic and irreversible with major consequences for the future of the $. The fall in the $ in the last few days has been faster and further than the market expected and reflects foreign sentiment on Paulson's Package. Foreigners are clearly underwhelmed by these hastily produced proposals. The problems faced by the U.S. financial system have been building up for some time and do require a fundamental reform of the principles underlying that system if confidence is to be recaptured. After all, every other nation on earth has to earn the dollars it has. The U.S. can simply print them and in vast quantities. Does this make a mockery of the underlying value of the currency?

Gold continues to be seen, even by central banks, as a “counter to the swings in the $”. With the current lack of confidence in the currency and the system that backs it, gold is clearly more measurable, reliable and free from the adjustable promises of men. This has to count in these days where money rules the globe not military power, land or religion. This estate of printed money has dominated the globe since 1971, led by one superpower, the U.S.A. Bring this into question and the ramifications are excessive uncertainty and sapping confidence. With the East winning the battle for wealth on the Trade front, the days of the $ as the global reserve currency have been numbered by these recent U.S. financial events.

Other global currencies?

All other global currencies are based on, and reliant on, the U.S. $ and face the same maladies as U.S. relative to their dealing on the trade and capital front with the U.S.A. It is therefore clear that all other global currencies will feel the ripple of U.S. financial maladies to a greater or lesser extent. None can escape them.

We have discussed in earlier articles?, that the evolution of gold will be to move away from reflecting the relationship to the $ and will reflect the state of all the globe's currencies. Previously when the $:€ was the measuring line, it implied that gold moves with the €, which is a baseless comparison. Gold should rise in each currency that is weakening and in an environment where one currency after another falls, then gold demand in each nation should rise, once the investors realize the damage being done to the buying power of their currencies.

This will be reflected in rising demand for gold in each nation as the buying power of the local currency changes, say with the oil price?

Where foreign currencies are held in national reserves, particularly where there are weakening currencies [e.g. the Chinese Yuan], gold is looking more and more attractive. While the amount of U.S. dollars in Chinese reserves is so huge, gold does not yet appear a realistic addition to their reserves as their buying would propel the gold price to such a level that they would not be able to acquire sufficient quantities. It does make sense, however, to buy all local production for their reserves, a move that would not initially cause the gold price to rocket.

No doubt though, with European Central Banks moving rapidly to a cessation of their gold sales, central banks are realizing more and more the importance of gold as a reserve asset. Will they act on this conclusion? We wait in anticipation to see if they do.

What does the Paulson package say to us all?

The sight of Wall Street investment banks collapsing and the impact it has on U.S. citizens sends tremendous alarm signals to those outside the U.S. plans to protect themselves from these problems are in the process of being made, whether they be investments inside the U.S. or the $ itself. This is a conclusion that cannot be avoided. A large rescue package, larger than the one before, does not solve the problems as exemplified by the rescue packages of the past. Yes, the markets may be becalmed but the tide has changed. Prudence demanded a run for cover and still demands it because the risks inherent in the system remain. House prices are falling, consumer access to credit remains diminished and trust has largely disappeared with matters getting worse still. Bankers themselves remain in trauma and need to be convinced that they can accommodate consumer credit against assets that need to rise in value from now on. Will that happen? What is needed now is renewed confidence and that still seems far off.

A recession is here, and the possibility of yet another financial disaster remains a present danger, this time on a global scale. The ability of the global economy to absorb another crisis is growing thin. Each time a crisis occurs, gold looks to be a safer place. Each time investment managers are disappointed with the solutions to the problem of the U.S. its role as global economic leader wanes. Each time this happens, the $ looks more vulnerable. So what's next?

In the States there is only one currency choice for the U.S. citizens. Yet nations overseas have a choice. If you had that choice, would you hold the $ if you didn't have to? Seen from a global viewpoint, the recent disasters have made it important not to trust eventual outcomes but to stay away until one can be certain of the future of the $. Just this alone will undermine the $. And this will continue until the $ becomes a currency of choice. This means an exciting future for the U.S. financial system and the $. Should we expect that?

Conclusion: Gold and the $ going forward

Available to Subscribers only – subscribe through www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2008 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

RST
26 Sep 08, 13:45
Panic

No need to panic -- things will correct themselves.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules