Gold surged at the open in Asia with news of the de facto nationalisation of the US’ mortgage giants in what amounts to the largest bailout in world financial history. It has since given up some of these gains in early trading in Europe due to more counter intuitive dollar strength which looks increasingly overbought.
Gold and silver remain very oversold, especially after last week’s fall in prices. Both are now screaming buys on value terms. Silver particularly so – however it has suffered significant damage technically and may fall further in the short term. The gold to silver ratio has risen sharply and is now at extremely high levels ($808.00/$12.38 = 65.26 ). Thus investors can now buy 65 ounces of silver with every one ounce of gold which is leading to a continuation in very robust and unprecedented investment demand for silver.
With no end in sight to the US housing crash and indeed signs that it is now impacting the rest of the US economy, the unprecedented safe haven demand for gold seen in recent months will likely continue for the foreseeable future.
Nationalisation of Fannie and Freddie is Bearish for US Dollar, US Stocks and Economy
The de facto nationalisation of the mortgage giants has been greeted by markets in another bout of care free irrational exuberance. The usual suspects and happy clappy cheerleaders would have us believe that “happy days are here again”.
Nothing could be further from the truth.
The nationalisation is the largest bailout in financial history and is taking “moral hazard” to a new unprecedented level. While the move has made Fannie and Freddie credit standing good again and eliminated the risk of default, it has increased the sovereign risk posed by the US government itself given the monumental size of the debt being assumed.
The liabilities are in excess of $5,400 billion.
The nationalization of Fannie Mae and Freddie Mac shows that the US is “more communist than China right now” but its brand of socialism is meant only for the rich, investor Jim Rogers, CEO of Rogers Holdings, told CNBC Europe on Monday.
“America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich… it’s just bailing out financial institutions,” Rogers said. “This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents. I’m not quite sure why I or anybody else should be paying for this,” Rogers told “Squawk Box Europe.”
By adding an estimated minimum of $800 billion to the already surging $9.67 trillion in national debt, this bailout could raise America’s national debt to $10.5 trillion – 75% of GDP.
And this comes at a time of already near record US trade and current account deficits and sharply rising budget deficits. The federal deficit this year will run to some $400 billion, and next year’s red ink is likely to hit a half trillion dollars.
US creditors in China, Japan, the Middle East and importantly Russia are already cutting back on their purchases of US debt instruments and should they become sellers we will see US treasuries fall in value with a corresponding increase in yields. The last thing an already struggling US economy could afford right now.
All of this could lead to a monetary crisis in the global reserve currency in the coming months. Thus, we are very likely witnessing a dead cat bounce in the dollar versus a number of other fastly deteriorating fiat currencies such as sterling and the euro.
Today’s Data and Influence
This week sees the release of a number of data reports that should help set the tone, though moves in the dollar and oil are likely to continue to influence direction.
Gold and Silver
Gold is trading at $809.60/810.10 per ounce (1245 GMT).
Silver is trading at $12.93/12.99 per ounce (1245 GMT).
Platinum is trading at $1379/1389 per ounce (1245 GMT).
Palladium is trading at $270/276 per ounce (1245 GMT).