RockyRacoon 2008crisis01 gold correction fa

Sat, 08/27/2011 - 22:54 | RockyRacoon

From page 11 of the issue:

From “Deleveraging” To ...?:
The financial crisis of 2008 was a “deleveraging” crisis. When the large US banks began to mark down
their CDOs (Collateralised Debt Obligations - aka “toxic sludge) to pennies on the Dollar in July 2008,
the cascade had begun. The reason that the Fed stepped into the breach in September and blew out its
“balance sheet” was to prevent the prices for this questionable debt paper on the secondary market from
utterly collapsing and taking the banking system with them. To prevent this, the Fed took them off the
banks’ books at 100 cents on the Dollar. They remain on the Fed’s books to this day.
Even this action by the US central bank was not enough to prevent a freeze up in inter-bank lending.
When this went international, financial markets imploded in a mad scramble to meet margin calls on debts
and to generally get out of debt to the greatest degree possible. Since most international debt paper was
then (and still is) denominated in the reserve currency - the US Dollar - the demand for US Dollars
soared. The Dollars left over from the market carnage had to go somewhere, so they went into Treasuries.
That was then - the six-month financial crisis which took place in late 2008/early 2009. That crisis
marked the end of the huge decade long run up of bank lending. What has happened since is that
governments and central banks have taken over from their banking system as the LAST entity standing
which can still lend new money into the system. That led to the sovereign debt crisis which was, until
recently, confined to Europe as far as the US mainstream financial press was concerned.
The “tipping point” came with the recent debt limit debate and the absurd “resolution” of that debate on
August 2, 2011. This episode rocked public “confidence” in the fiscal and monetary policies pursued by
all governments - but especially by the US government - to very near its breaking point. If S&P’s
downgrade of US Treasuries had happened even two months earlier, it would have shocked the American
people to the core. But by the time it happened on August 5, the American people had already had a good
look at the total inability of their government to come up with anything remotely credible in the way of
spending reduction. The S&P move merely told them what they already knew - or strongly suspected.
As Doug Noland put it in his August 19 Credit Bubble Bulletin on Prudent Bear: “The American people
no longer buy the notion that piling on more debt and “money printing” offers a reasonable solution.
...There will be less tolerance for this ‘experiment’ going forward.”
Indeed there will be less tolerance, not only inside but outside the US. The price of Gold is showing that.

It May Be 2008 All Over Again, But There Is One Key Difference

 

 

Submitted by Tyler Durden on 08/27/2011 16:57 -0400

• Lehman
• US Dollar Index

The financial press has been inundated with articles comparing what is happening in global markets now to events in the latter part of 2008. Sure enough, the surge in Treasurys from 100 to 143 in the last two months of 2008 following the Lehman bankruptcy is most comparable to the move in the same security from 122 to 140 in the two months since the beginning of July 2011. What is disturbing is that the bulk of this move has happened after the August 2 debt deal, and after the announcement of QE2.5 or "ZIRP through mid-2013" by the Fed on August 9. Additionally, stocks have also traded in a pattern very reminiscent to what happened during the first round of the Great Financial Crisis, but the lock up in capital market liquidity, especially in Europe, may be the most obvious parallel between the two time periods. That said, there is one key difference between 2008 and 2011. Bill Buckler, in the latest edition of his Privateer, demonstrates what it is...

A Race In Opposite Directions:

 

How scary is it? The best illustration comes from the $US Gold price. The “price” of longer-term US Treasury debt has risen by 14.75 percent since the beginning of July. Over the same period, the $US price of Gold has risen from $US 1482 to its August 19 spot future close of $US 1852. That’s a rise of $US 370 or 25 percent. Yet US Treasury debt and Gold are polar opposites in any sane evaluation of the financial system. Treasury debt is the foundation of the global monetary system. Gold is the pariah of the global monetary system and has been locked out of it in any official form for four decades.

 

With all the comparisons to the events of 2008 which have been appearing in the mainstream financial media, this comparison has been all but totally overlooked. Cast your mind back to the carnage of late 2008. During that period, almost everything was sold off. While it is true that Gold did not fall nearly as far as did most of its fellow “commodities”, it is nonetheless a fact that in the two months between mid September and mid November 2008, Gold fell from about $US 920 to $US 700. That’s about 24 percent.

 

There were two financial assets which boomed in late 2008. One was Treasury debt, the other was the US Dollar. While Gold and everything else was falling out of bed, the trade-weighted US Dollar index - the USDX - soared 21 percent from 73 to 88.2 between early August and late November 2008.

 

Compare that to what is happening now. Treasuries are soaring but the US Dollar is, at best, flat. And Gold in terms of EVERY major paper currency has gone ballistic. This time, things do look different.