Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Chinese Tech Stocks CCP Paranoia and Best AI Tech Stocks ETF - 26th Oct 21
Food Prices & Farm Inputs Getting Hard to Stomach - 26th Oct 21
Has Zillow’s Collapse Signaled A Warning For The Capital Markets? - 26th Oct 21
Dave Antrobus Welcomes Caribou to Award-Winning Group Inc & Co - 26th Oct 21
Stock Market New Intermediate uptrend - 26th Oct 21
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Central Bankers Meet in Switzerland to Discuss Global Financial Crisis

Interest-Rates / Credit Crisis 2008 Mar 07, 2008 - 02:37 PM GMT

By: Adrian_Ash

Interest-Rates

The Ghost of Gold at the Central Bank Banquet
"Never shake thy gory locks at me...If thou canst nod, speak too."
Macbeth to Banquo's ghost, who's sitting in his chair ( Macbeth Act III, Scene iv)

THIS WEEKEND in Basel, Switzerland, central bankers from the G-10 group of rich nations meet up for one of their regular hoe-downs.


You can guess the main event in between canapés and champagne – academic chit-chat about interest rates, political pressure and banking supervision. The global financial crisis will surely get plenty of air-time, too.

After all, Ambac Financial – the giant "monoline" bond insurance group – this week issued and sold $1.5 billion in new shares and convertible bonds, raising cash to defend its credit rating but accepting a 9% discount to ABK's stock-market price.

"The stock offering nearly tripled the number of Ambac shares outstanding," according to Reuters. ABK closed the day 15% lower.

Real estate investment trusts also slumped Thursday after Thornburg Mortgage – which lost 60% on the day – admitted to the New York authorities that it missed a $28 million margin call from J.P.Morgan Chase this week. And here in London , a number of major hedge funds were rumored to be right up against it after their brokers called in credit lines and forced a fresh wave of liquidations.

All told, says Nouriel Roubini – a former advisor to the US Treasury – "the risk of a systemic crisis is rising. The markets are becoming utterly unhinged, the financial system is broken and everybody's in de-levering mode..."

Hey gentlemen, let's clear the gloom! Who's for a break? Shall we say one hour for lunch...?

And so Ben Bernanke, the two Jean-Claudes of Europe, Mervyn "Moley" King from London and all the rest crowd together into the dining hall, asking after wives and children while getting ready for another heavy meal...drowning in another rich, cream sauce...and eaten beneath even heavier Swiss winter skies...

But wait! Who's that – already sitting in Ben Bernanke's place?

"Letting gold go to $850 per ounce was a mistake," wrote Paul Volcker – chairman of the US Federal Reserve during the last great Dollar crisis of the late 1970s.

"We had to deal with inflation," he went on in a PBS interview of Sept. 2000. "There was a kind of great speculative pressure. It was the years when everybody wanted to buy collectibles from New York . The market was booming, and other markets of real things were booming – because people had got the feeling that things were inflating and there was no way you could stop it."

At one policy meeting in 1979, the Fed committee noted that "speculative activity" in the Gold Market was spilling over into other commodity markets. An official at the US Treasury called the gold rush "a symptom of growing concern about world-wide inflation."

What a mistake! Barely nine years after Richard Nixon floated the US Dollar free of that "barbarous relic" known as the Gold Standard – and scarcely 18 months after the International Monetary Fund "eliminated the use of gold" as money altogether (or so the IMF thought) – just mentioning the bull market in Gold Prices only served to push the gold price higher!

Would the policy wonks never learn? You can't dispense with gold as money and yet dare to speak its name.

Put another way, perhaps, you just can't dispense with gold as money...

"All of a sudden," writes Peter Bernstein of late 1979 in his tome The Power of Gold , "central banks began to make noises about restoring gold to its traditional role in the monetary system, a complete reversal of recent policies of selling gold out of their reserves.

"The US undersecretary of the Treasury declared before Congress that 'Gold remains a significant part of the reserves of the central banks available in times of need.'...Then Treasury secretary G.William Miller held a news conference at which he announced that the Treasury would hold no further gold auctions [saying] 'it doesn't seem an appropriate time to sell our gold.'

"This was a curious observation in light of the auctions that the Treasury had conducted at much lower prices since they began the practice five years earlier [and] within thirty minutes of Miller's remarks, the Gold Price shot up $30 an ounce to $715. The next day it was up to $760. The day after gold hit $820."

Of course, here in March 2007, thirty-dollar moves are a daily occurrence. Anyone choosing to Buy Gold today had better get used to this kind of volatility, too. But it's nothing next to the volatility now hitting world confidence in government money and financial debt.

The big difference between now and the 1970s bull market in gold is that even as the US Dollar is sinking to all-time record lows – both against gold and the rest of the world's currencies – the world's financial markets also face a genuine meltdown.

The reason? Credit default – or even the merest hint of it. This spook is now jumping out of cupboards and walking through walls right from Sydney to California , and all points in between.

That's why, last time they met, just after the Northern Rock collapse hit the United Kingdom (the world's fourth largest economy), the G-10 central bankers agreed in December to coordinate half-a-trillion in short-term loans to the US and European money markets.

Pumped into the private banks by the Federal Reserve, Bank of England and European Central Bank, this flood of emergency lending really did ease the panic in Western money markets, bringing open-market interest rates down from a seven-year high towards the central banks' "target" rates.

But still the ghost won't die! Because interbank lending rates have now shot higher again – a clear sign that "banks are hoarding cash because of fears of further hedge fund collapses," says the Financial Times .

Whereas physical Gold Bullion – if owned outright as your property, rather than via "trust" fund trickery or the counterparty risk of futures and options – still represents the only liquid financial asset that nobody can default on. And the danger of default is what's driving investors out of stocks and bonds into – oh no! – into Dollars!

"Boo!" says the spook, dancing on the dining table...

Three-month interbank lending rates have now hit 4.40% for Euros, up from 4.33% in mid-Feb. Three-month Sterling rates have risen to 5.77% – up from 5.48% in late Jan. – even after a 0.25% cut in the Bank of England's preferred rate last month.

"In the US ," the FT says, the "three-month Dollar [rate] has fallen, but it still remains well above the expected Fed Funds rate, suggesting bankers view the outlook as extremely uncertain [after] the collapse of Focus Capital, the New York hedge fund, and the failure of Peloton Partners' asset-backed securities fund."

So put the surging oil price and war in the Middle East to one side, if you can. Try to forget about the US recession too...as well as the crisis now looming in Eurozone government debt, world food prices and Russian gas supplies.

Just take one Dollar crisis and add a global financial panic after five years of unprecedented credit expansion. What do you get? On one side of the table, a record bid for physical Gold .

And on the other, a gaggle of central bankers – holed up in Switzerland – pale and quaking like they just saw a ghost.

"Prithee, see there! Behold! Look! Lo! How say you?"

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

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


Post Comment

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