Some say that the gold bull market has suffered severe damage, which will affect its long-term prospects. If we were to accept these statements then it would appear that the gold ‘bull’ market is over. But are these statements acceptable and do they reflect the true picture underlying the gold [and silver] markets?
To get the proper perspective let’s stand back and look at the ‘BIG’ picture.
Is the Worst Over?
Not according to the I.M.F. An assessment by the International Monetary Fund says potential losses as a result of the credit crisis could exceed US$1 trillion. The assessment includes warnings that further losses and write-downs on prime mortgages, commercial real estate, leveraged loans, and consumer finance were likely. The IMF’s Global Financial Stability report put credit market losses at USD945bn, as of mid-March, with more losses expected for months to come.
The report also stressed the fact that the credit crisis was impacting the full spectrum of the financial market in one way or another, with losses distributed between banks, insurance companies, pension funds, hedge funds, and other investors. We note that credit card finance alongside car finance has been included in assets acceptable to the Fed as collateral, which tells us it is not over by a long shot.
U.S. Trade Deficit
February recorded a Trade deficit of $62.3 billion against a January deficit of $59.0. This still looks like a $720 billion deficit to us and with oil prices now at over $120 a barrel and Chinese imports still cheaper than local products and flooding in, the prospects are for a worse annual Trade deficit than ever before. And there is no real sign that this deficit is dropping.
With OPEC talking of a potential oil price of $200 a barrel something has to be done to stop more than a decline in the $; a stop must be put to the massive global scramble for resources by a combination of the developed world and the emerging world, because prices will continue to rise until they are so high that some will have to do without. This problem is about the massive rises in demand with far greater ones to come.
So are there solutions in the pipeline? It seems that the only solutions available to the authorities are existing market controls and proposed market controls on all types of markets, but not on a globally coordinated front. Unless there is global coordination such control will be completely inadequate.
Control of the Markets
Little has been published on the proposed actions by the Treasury Department, the Fed, and the G-7. But they are actions that will attempt to place important markets under the control of monetary authorities of the G-7. They do not, however, include the interests of the emerging nations on important fronts.
The plan of Treasury Secretary Paulson to overhaul the financial system included a crucial proposal: it would officially transform the Federal Reserve into a “market stability regulator.” The U.S. Treasury has indicated that the Fed could use proposed new regulatory powers to stop, “credit and asset market excesses from reaching the point where they threaten economic stability.” David Nason, assistant secretary for financial institutions, said the Fed could even use its proposed “macro-prudential” authority to order banks, hedge funds, and other entities to curtail strategies that put financial stability at risk.
Treasury wants to merge the Securities and Exchange Commission, the US markets watchdog, with the Commodity Futures Trading Commission that is charged with overseeing the activities of the nation’s futures market. A conceptual model for an “optimal” regulatory framework focused was being put forward to achieve three objectives: market stability, safety and soundness with government backing, and business conduct.
A working group was being established between Britain and the United States to sketch out the best way to tackle financial market turmoil. The British government said that it wants to work closely with the US and our other major international partners in dealing with the global financial turbulence. This is a global issue that requires a global response, it said. While it appears the intentions are noble, they are without doubt ways and means to control markets as the Fed deems fit, inside the USA and the UK.
“The G-7 group of nations agreed to “calm markets showing irrational moves”. But this message did not have enough emphasis or was it ignored as a threat? To reinforce the statement, Jean-Claude Juncker, Luxembourg’s premier and the chair of Europe’s finance ministers, announced on April 23 “financial markets and other actors [had not] correctly and entirely understood the message of the [recent] G7 meeting.” In other words, markets were put on notice that the world authorities may [will and are?] take action to halt the collapse of the US$ and undercut commodity speculation by hedge funds.”
“French Finance Minister Christine Lagarde likened the recent G-7 stance to the 1985 Plaza Accord when the industrialized nations agreed to “coordinated intervention” to drive down the US$.
“Could this be a joint effort by the States and Europe to try to impose a tight trading range on the €: $ movements in the future? We think it is as the €: $ exchange rate moves of the last few weeks have shown [trading between $1.54 and $1.59 against the €]. Much as Central Banks don’t want to ‘intervene’ in foreign exchange markets, it seems that they will do so. Threats will be ignored until turned into action.
“Now we have food crises; governments in the emerging world are proposing other market controls. The issue of food inflation has led some governments to contemplate provocative strategies to lower food prices. India is reported to be considering a ban on trading in food futures, a move designed to stifle what the Indian government regards the speculative influence of hedge funds and financial market traders in the recent surge in commodities prices. As food shortages build up food protectionism is starting in some nations, curtailing exports of food needed internally. This type of control has to become more widespread as food prices hurt nation after nation going forward. With food as well as resource prices running up dramatically action to restrain them will have to be taken on a national basis, which we do not see being followed through on an international front.
“It seems inevitable that more and more controls will have to be imposed on more and more markets. It is inevitable that global movements of capital will have to be retrained at national levels. The world just cannot afford to have the huge wealth funds and trade surpluses running through constrained exchange rates, spreading inflation through higher prices, until local capital and trade markets demand drastic exchange controls. Attempts at intervening in foreign exchange markets to contain exchange rates will attract the switching of huge surpluses into currencies other than the US$. US-based funds can be controlled for sure, but can Asian and Middle Eastern ones? History well testifies that it takes the full impact of a crisis to give good political cause to trigger draconian measures, such as Capital and Exchange Controls.
The Impact on Gold and Silver Prices
While monetary authorities may not be happy to see a resurgence of global demand for gold and silver, those who are able to will see these mounting controls as a threat to the true measure of value, which currencies have provided since the last world war. As the dangers become more apparent, the $: € exchange rate will not serve as a determinant of the gold and silver prices, but the falling macro-confidence, fear of more instability, doubts about the value of global currencies, both ‘hard’ and ‘soft’ and uncertainty on a broad global front, will prompt a broadening of the type of global investors attracted to these metals to reflect these fears over time, to ensure that the gold and silver prices reflect global values and counter those measured against controlled values [managed currencies] in other markets.