Systemic Financial Crisis and Its Implications for Gold

The cyclical bear market in equities, which is around 6 months old, is still far from being over. Problems caused by the real estate bubble, which are now permeating throughout the entire US economy, cannot be solved quickly.

The fact that the real estate contagion has caused a severe infection of the entire US financial system is now finally being widely admitted by Wall Street. This realization is well reflected by how the labeling of the crisis by the media evolved over the past year: from a “Subprime Crisis” in early 2007 to a “Liquidity / Credit Crisis” in summer 2007 to a more recent “Solvency Crisis” and now finally to a “Systemic Crisis.”

A Systemic Financial Crisis requires a solution that will not take months but rather several years. At present, the Federal Reserve and the federal government are being forced to address two main issues:

1. How to prevent a collapse of the ailing financial system; and
2. How to convince the entire world that the US financial system will be rebuilt based upon a new, strong and healthy foundation.

The first problem is highly relevant and to solve it, two methods are being implemented:

1. Inflationary legislation and easing Fed policy. Congress pushed through a fiscal stimulus bill for $150 billion, and more legislation is unquestionably on its way. The Fed is providing monetary stimulus by slashing interest rates and attempting to increase money supply;
2. A masked bailout of the financial institutions by the way of fixing their awful state of affairs through damaging the Federal Reserve’s balance sheet. This is being accomplished by swapping Asset Backed Securities with unknown market values for the highly liquid treasuries. The model for a swap of non-liquid bank assets in exchange for government treasuries was first implemented in the Fed’s deal with JP Morgan (JPM) in March and has since been used in the $200 billion Term Securities Lending Facility.

Ultimately, these ways of addressing system problems will only be viewed as the first steps toward a massive nationalization of mortgages which are under a threat of foreclosure.

Further deterioration of the Fed’s balance sheet will cause continued weakness in the US dollar and contribute to the already super bullish fundamentals on gold.

A continuing crisis in the financial system which caused a dramatic risk aversion on behalf of investors, has led to a temporary distaste for the junior mining sector. When combined with exceptionally robust prices for precious metals, this has led to extraordinary values in many small cap gold and silver juniors; such are the opportunities which we continue to seek out.

Comments

[phinsuntanning]

"a massive nationalization of mortgages which are under a threat of foreclosure"? so Chavez was not so wrong... incredible, is this a market economy or what?

[sivere]

Wait a minute. The subprime crisis was CAUSED by the investment bankers screaming for more paper, any papaer. And the mortgage brokers supplied it. The "Real Estate Bubble" as simply the dying breath of the "Derivatives Bubble" which dwarfs the world's GDP.

Let's keep things in perspective.

See siv0.com and TakeBackTheFed.com

[User 139223]

reinforces my premise that all bankers should be forced by law to wear masks.....

[oldbluejeans]

This market is and has been for some time disconnected from reality. We are in a shooting war in the middle east, oil over $100 per barrel, almost all forms of debt repayment under duress. And the market is "whistling past the graveyard."

[AmesTiedeman]

It was announced that the IMF is going to sell 13 million ounces of Gold over the next several years.

[eric hart]

We will see inflation and deflation over the next five to ten years.

Debt assets,real estate, banks and debt paper will deflate, and real assets will inflate.

Foreigners are net sellers of US treasuries and the US dollar will continue to decline for several years as the Dollar loses its reserve hegemony, and is replaced by gold and baskets of currencies held as reserve.

This process will be take decades. The IMF is a political organization as much or more than a financial one--it will lose money on the sales.


Finally, Visa does have debt exposure--as fewer people use their cards, and bankruptcies increase, transactions will not materialize as expected.

[DanSchmeidler]

Market update 4/8/08: Financials are mixed. Gold down. Gold miners down. Not as ugly as yesterday, though, when Financials were up and Gold was down. This market is just setting itself up for trouble.