Golden Dreams, Fallacies, and Nightmares
Since 2003 I have been an aggressive buyer of the yellow metal, as well as it's little brother, Silver. I banked out when gold first hit $1000 and silver went over $15 (a little early as it ran to $20) to lock in some nice profits. Not too long ago I entered back in. I am no "Gold Bug" as I play other areas, but it is my favorite sector by far.
With that said there was plenty of information out there today that was interesting as it relates to gold. The first item is a gold buyers dream, China thinking about deploying their massive reserves into gold instead of useless US treasuries (Hat tip Jesse's Cafe):
Survey: Over Two-Thirds of Chinese Economists Favor Gold Over US Bonds
by CSC staff, Shanghai
In a survey of major Chinese economists, more than two-thirds are reportedly bearish on the prospect of China increasing its holdings of US government bonds, and believe instead the nation should putting more of its hard-earned into gold.
According to a China Business News survey of 70 Chinese economists (including one foreign economist), the exact figure is 71.4% anti-bonds and pro-gold.
The use of China's huge foreign exchange reserve is a topic of concern and controversy. The remaining 28.6% of those polled believe China should continue to buy U.S. Treasury bonds. 38.6% think that China should not continue to buy, but also should not to sell US bonds. 32.8% believe that China should unload the bonds, 22.8% of whom think we should have a slight sell-off, while 10% think China should drop them like a bad habit.
All this is against a backdrop of China surpassing Japan to become America's largest US bond holder and of the ever-widening global financial kerfuffle.
Add to this mantra with this story about Russia:
RPT-Russia bans Nat'l Wealth Fund investment in agencies
Thu Mar 5, 2009 5:01am EST
MOSCOW, March 5 (Reuters) - Russia banned investment of its $83.7 billion National Wealth Fund in bonds issued by foreign government agencies such as Fannie Mae (FNM.N) and Freddie Mac (FRE.N), the Finance Ministry said on Thursday.
The ministry said earlier on Thursday it had also banned investment of its $136.3 billion Reserve Fund in foreign government agencies' bonds. (Reporting by Gleb Bryanski and Yelena Fabrichnaya)
China wanting to add to their gold reserves would be very positive for gold. Russia ceasing agency debt buying would also be positive as Russia has expressed a desire to add gold as well.
Taken together this is just a bunch of talk. It is worth noting however that open discussion is now common about leaving the automatic "buy US Treasuries and agencies" lever pulled to full throttle. What would happen if China started to buy gold aggressively and then started to dump US treasuries? I think you can figure that one out.
Also from Jesse's Cafe Americain today I saw this statement I have seen a million times that makes no sense to me:
"In all seriousness, if China starts pressing this issue the US will have no choice but engage in the long overdue revaluation of its national gold reserves significantly higher. This would be one method of reducing the national debt to China and buying back some of the Treasury bonds.
Unfortunately in this case 'higher' would be a factor of x5 at least, or as high as an order of magnitude, x10."
All the gold ever mined is 145,000 tonnes (1 Tonne=32,150.75 troy ounces). At a price of $900 an ounce that is a dollar equivalent of 4.1 trillion dollars. The US values its gold a price between $40-$50 dollars an ounce. The US has reported it has 8113.5 tonnes of gold as reserves. If we revalue this at $900 an ounce, the US holds 234 Billion dollars in gold bullion. That is not even enough to bail out AIG! Unless the US has some crazy store of gold we do not know about (Yamashita's gold?) this will not help at all.
Think about that for one minute: the US could almost buy all the gold in the world for what next years budget (3.6 Trillion) is going to be! Still think gold at $2000 or $3000 an ounce is "stupid" or "insane"?
Of course the ultimate nightmare is that fiat money collapses and then you can kiss any gold, gold mining stocks, and foreign gold stashes bye bye. Just like in 1933-1934 gold will be outlawed so only bankers can hold it. We must hope for something in between.
The "Moment" has not Yet Arrived
Loyal reader Watchtower reminds me that in an article from February 16th I offered the following:
"It feels like we are coming down to "the moment" at last. I have had this feeling two other times over the past 6 months, so maybe I am off as usual. The slow realization that the banks are too far gone may be taking hold. Remember just last August when analyst's were optimistic after banks had "kitchen sink" write downs? Soon we should have a price tag presented as well. All told we should be on the hook for over 10 trillion dollars. What a country."
Of course a stopped clock is right twice a day, and since that post the markets have lost ground in a major way.
So is this what I meant by "the moment"? Sadly, No. I would have guessed that with the DOW, S&P and Nasdaq where they closed today that "the moment" had occurred. I am uneasy that what I called for, realization about the banks, has not taken hold and yet the markets are getting mauled.
Market Ticker has a scary post up today showing what will happen if we do not get all the crap figured out soon and stop playing bailout games. If you want to sleep tonight, you may want to wait until tomorrow to read it.
There is still too much "hide the bad assets", "keep homeowners in their homes", and "get credit lending going" optimism for "the moment" to occur. Until and unless we grow up and face what has to happen, there may be no end to the downside.
Note: a related story on CDS weapons we talked about can be found here.
The Only Stigma for the Banks is that they are Banks
The new TARP, TALF, PUKE or whatever acronym programs were supposed to have greater transparency so that taxpayers might get an idea how their futures were being wasted, I mean spent. At every juncture the FED and the Treasury have balked and outright denied any accountability or documentation for their actions.
It has slowly come to light that the whole AIG dilemma is that the US taxpayer must make good on contracts to European Banks (hat tip Capitalist Preservation). Add to this that Bernanke and Geithner are a tandem echo chamber and claim that to release information about which banks took what funds and where they went might cast "A Stigma" on those banks and cause them a disadvantage.
Well I am no chart technician, but I would ask the FED and the Treasury to review the following 6 Month Charts:
Bank of America
I would ask the FED/Treasury just what more do you think could happen? Soon all the banks will be at $1 and then I guess there will be no disadvantage!
The only stigma that matters is that the banks are holding tons of bad debts and the government keeps trying to stall for time. The pure lunacy of the FED/Treasury argument is hard to understand. There must be more, so much more to all of this. One day we may find out and the "no criminal charges" clause the TARP bill had attached for officials involved will come back to bite us. Of course, if a government is dissolved and another put in place all prior agreements are null and void. I wonder very much if Hank Paulson still lives in the USA?
Have a good night.