Gold’s Historic Day, Treasury Madness, Splitting Up Wall Street, Resource Stocks, and More!

by Addison Wiggin & Ian Mathias

  • Gold’s best day in history… the real reason behind the $100 spike
  • John Williams on the Treasury’s desperate attempt to shore up the Fed’s balance sheet
  • Watch the bonds… typically boring market in huge swings
  • Sign of the times… foreign banks snap up Lehman assets, look to buy Morgan Stanley
  • Other commodities back on the rise… Dan Amoss on the likely future of the resource sector

  If you own gold, this week is anything but depressing. In fact, yesterday was the single best day for gold traders — in dollar terms — since the once forlorn metal began trading again on the New York Mercantile Exchange, on Dec. 31, 1974.  

The spot price leapt $70, to $850, in the U.S. session, then another $20 in after-hours trading… then another $20 in Asia as we slept. It came close to breaking through the $900 mark. It’s settled back down to $880 as we write. 

Why the sudden spike? Given the noise coming from the financial media this morning, we envision there must be a little glass box issued to each network emblazoned with the following: “In case of gold rally, break glass and read confidently.”

“It’s a flight to quality as stocks fall,” say some. “A flood in safe-haven buying,” say others. Still others are speculating the next leg of the commodities bull, started at precisely 10 a.m. yesterday.

Au contraire, we say. Gold was performing its historic role as the antithesis to the financial system at large. In fact, it began its historic rally the moment Bloomberg published this headline:

  “Treasury to Sell Bills to Bolster Fed Balance Sheet”

The Fed has asked the Treasury for a $100 billion loan. Owing to the TAFs and TSLFs we’ve been carping about all year — and the billions and billions the Fed has deployed to bail out Wall Street — the central bank’s holdings of Treasury securities have declined by at least 35%.

The Fed began the year with $741 billion. Last week — before all the madness with AIG and liquidity goosing this week — they had only $478 billion left. Thus, the Treasury has agreed to sell $100 billion in American IOUs to keep the Fed’s balance sheet “strong.”

The mainstream didn’t give this one much attention… Lehman, AIG, WaMu, Morgan Stanley and the S&P 500 are all that “matters” on the surface. But gold bulls wouldn’t miss this for the world.

  “This process will eventually end in hyperinflation and complete debasement of the U.S. dollar,” opines John Williams. “Whether the resulting cash is placed into the system by the Fed (which seems to be trying to dodge showing an increase in bank reserves while making its assets look a little better) or by the U.S. Treasury, the effect will be the same: increased growth in broad money supply.

“So the U.S. system faces an inflation problem in terms of prices for goods and services, not a deflation problem. Recession and asset deflation are not at all inconsistent with price inflation, as was seen in the 1970s. There will be no price deflation without a sharp drop in the broad money supply (as in a year-to-year decline).

“Such a decline was not in the works, and current Fed and Treasury activity is promising even stronger money growth in the immediate future. Messrs Bernanke and Paulson tacitly have confirmed that they will create whatever money they have to create in order to prevent a systemic collapse.”

  Ugh… and just as we were writing this, the Fed announced they’ve injected another $55 billion into the financial system.

  Perversely, bond yields are at historic lows. We told you about the incredible depths of the 30-year note on Tuesday. Today, we see that the rate on a three-month T-bill has fallen to its lowest since at least 1954, when Wall Street started keeping track.

Under normal circumstances, it would almost make sense. With a severe market downturn and an even scarier crisis among U.S. banks, Treasury notes would represent one of the safest places to store cash… if you weren’t living in I.O.U.S.A.

  The events of this week and last remind us of a time, back in 2003, when we went to London to hear legendary bond guru Jim Bianco give a talk on Fannie and Freddie’s exposure to the derivatives market. We were living in Paris at the time. Dan Denning, who currently heads up our Australian efforts , was visiting. We made the trek up to London on the Eurostar.

After the luncheon, Dan and I cornered Bianco by the sandwich buffet. We’d probably hit the wine bar a little heavily, but in our discussion, we asked what would happen if the derivatives market got ahead of itself and Fannie and Freddie had to declare bankruptcy.

“Couldn’t that possibly lead to a downgrade of U.S. Treasuries…?” We asked, not letting him slip by.

“Couldn’t happen,” Jim said. “That would mean the end of the global financial system. Couldn’t happen.”

Hmmn… couldn’t it, though?

  Investors took to measly Treasury yields yesterday because the U.S. stock market plummeted, again. The Dow fell 449 points, or 4%. The S&P fared even worse, down 4.7%. And the Nasdaq took the cake, down 4.9%.

Banks led the way down. The perverse logic that has dominated most of ’08 has given way to unbridled contempt. Precious metal stocks were really the only saving grace.

  Morgan Stanley and Goldman Sachs, long heralded the “good guys” of the credit crisis, are now looking just as dubious as their counterparts.

Morgan Stanley announced this morning they have begun official negotiations for a merger with Wachvoia. Where is Wachovia getting the capital for such discussion? Who knows? Rumors also abound that the Chinese sovereign wealth fund, China Investment Corp., is interested in Morgan too.

  Washington Mutual is itself lying prostrate for a sale.

The biggest U.S. savings and loan announced yesterday it has hired Goldman Sachs to conduct an auction of its assets. Wells Fargo, JPMorgan Chase, HSBC and Citi have all expressed interest, but none has, as yet, pulled the trigger.

  Barclays snapped up Lehman’s North American investment banking and capital markets businesses for $1.75 billion yesterday. The move makes U.K. based Barclays the third largest investment bank in the U.S.

Included in the deal is this:

Barclays gets Lehman’s famous downtown address and two other properties in New Jersey for a scant $800 million.

  Reserve Primary, the U.S.’ oldest money market fund, announced this week it had been holding $785 million in Lehman commercial paper. The money market fund, which manages over $64 billion, “broke the buck” yesterday, meaning its shares dropped below $1 — the first money market fund to do so since 1994 and the biggest in history, by far.

  This morning, Warren Buffett’s MidAmerican Energy Holdings announced they’ve purchased Constellation Energy. Constellation, among other activities, provides gas and electric to your editors here in Baltimore. We can’t say we’re too upset to be under the wing of Berkshire Hathaway.

  The dollar is still sliding. The dollar index sank below 78 today — a one-month low.

Oil, natural gas — almost all commodities, for that matter — perked up yesterday as the dollar fell. Oil is back up to $100 a barrel, for example.

“Once the fall in housing and mortgage securities slows down,” notes Dan Amoss, “excess liquidity created by central banks will find its way back into inflation hedges like gold and oil, potentially creating a future bubble in commodity-oriented investments.

“The fundamentals of supply and demand will matter again once current fears ebb. They always do. Energy and commodities have solid long-term fundamentals that rest on a foundation of human need.

“As for the rest of 2008, my research leads me to the following most likely outcome: The stock market remains weak until the Federal Reserve totally abandons its ‘inflation fighting’ stance. The Fed may even cut rates further as unemployment rises. At that point, commodity-oriented stocks will probably regain their position of leadership.

“The recent decline in commodity prices allows the Fed to conjure up another ’deflation’ scare. This would provide cover to slash rates and inject reserves more aggressively into the banking system. Then, the U.S. dollar would resume its descent, while gold and commodities would resume their ascent.”

  Remember the I-35 bridge collapse in Minneapolis that killed 13 commuters and injured 145 others? The new bridge, built in the same spot, will open today. It took nearly $250 million and 11 months of 24/7 labor to rebuild it. Before its collapse, the I-35 bridge was only 40 years old.

Infrastructure, both new and old, will be one of the 21st century’s greatest investment booms. Stay tuned.

  "If I were to sell a package of disguised toxic product," writes a reader, "with a dishonest description, say organic chicken broth, rated AAA by my friends at the appropriate standards agency in exchange for a few dollars, and then the whole of the world were to be poisoned by the soup they bought from me, I imagine I would spend years behind bars.

"The most surprising thing I have noted is that not once have I read a single report of criminal investigation or pending prosecutions [of financial houses]. I am in the U.K., so perhaps I have missed such reports. I realize that it is expensive to prosecute massively wealth defendants, a very good reason not to give people huge severance deals when they have to leave their jobs because of their criminal behavior, greed and reckless attitude. However, even the U.S. government must be able to afford to take them to court.

"The folks who created the current problems in the financial world did so many things that are obviously criminal that it seems to me that only their insider status and the scale of their crimes mean that they seem not to be facing decades in prison, at least as far as I know.

"I am a British self-employed, saver-investor and mortgage holder, with 10 years or so to retirement, a typical innocent victim of these fraudsters, along with almost every other citizen of the developed and developing world. I will have great difficulty financing the future of my business, and this will seriously affect our chances of survival, let alone prosperity. How many billions of the world’s population have the crooks injured or devastated?"

The 5: Amen. The only problem with the sentiment you’re expressing is it makes demagoguery of the worst sort all the more likely in the aftermath of this meltdown.

“We don’t know what to do,” Harry Reid, D-Nev., the Senate majority leader said on NPR this morning. “This is a whole new game. It’s not soccer, or football or baseball. It’s a whole new ballgame, and we [the Senators] need to learn how to play.”

Here we go. The only thing that is certain is they — and every other do-gooder inside the Beltway — will “do something.” It will be too late and way over the top, but they will certainly “do something.”

Lord, help us.

Addison Wiggin,
The 5 Min. Forecast

P.S. We were invited to speak before the National Press Club in early October. That ought to be fun… or funny. Details forthcoming.

P.P.S. Also, we want to remind you that I.O.U.S.A. will be screening twice this weekend at the Chesapeake Film Festival in Easton, Md. The first showing will be at 10 a.m. Saturday, and the second at 1 p.m. Sunday. The Eastern Shore is gorgeous this time of year. Even in spite of the film, it will be worth the trip. Please come, if you can swing it.  


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