That is the consensus figure for how much "liquidity" world Central Banks injected into their various economies over the last two days of the week just ended. In the lead thus far is the European Central Bank (ECB) which stunned the financial world on August 9 with the announcement of a massive 95 Billion Euro injection to "assure orderly conditions on the Euro money market". Of course, this move ensured that conditions on world stock markets were anything but "orderly", as falls cascaded across the time zones from Asia to Europe to North America.
On top of that, the world's commercial banks have overnight become very much more careful about lending US Dollars to each other. Rates on inter-bank US Dollar loans have abruptly zoomed upward to their highest levels in six years (think the market debacle in the wake of 9/11) while Central Bankers everywhere are bellowing at the top of their lungs that everything is under control. Funny in financial history to trace the invariable compulsion of almost all financial officials to "protest too much" that everything is under control. One is reminded of the story about the Captain of the Titanic blithely assuring passengers that they have plenty of lifeboats for everybody.
The problem they are facing is acute - and twofold. First, more and more big commercial banks are facing demands for withdrawals from their funds, a disturbing portion of which is CASH withdrawals. The funds under pressure are almost invariably those which have as a significant part of their makeup US subprime mortgage paper. The second problem is that, since much of this paper has never had its actual value tested on open markets, the banks which hold it literally have no idea what it is worth, so they can't "cash it out". The one thing which is crystal clear is that the Central Banks don't thing it's worth anything like the book valuation, otherwise they would not be unanimously injecting "liquidity" into the system.
If you have been following the growing degeneration in paper "assets" since its inception back in February with the first signs of US subprime mortgage granters' difficulties, you know that EVERY worsening stage has been met with ever louder "assurances" that the problem was an isolated one. When the problem first broke out, it was only going to affect "irresponsible" lenders in the US with no possible ramifications on the wider markets either inside or outside the US. Now, of course, it is hanging like a financial storm cloud over the entire global interbank payment system. Worse, it is threatening the sustainability of the global credit expansion which led to it in the first place.
World Central Banks can certainly "create liquidity" without limit, there are no constraints on them at all. The money they issue is not redeemable in anything but the money they issue. But it is one thing to create new credits, it is quite another to get people to borrow it and thereby inject it into the system where it can be pyramided by the fractional reserve techniques so beloved of banks everywhere. Are the Central Banks "pushing on a string"? Time will tell, but all the signs so far point straight in that direction.
When the ECB made their surprise announcement on August 9, the rush into liquidity spiked to new highs in the volatility which has overtaken markets in the past three weeks. Nothing could be immune, and Gold (and Silver) duly sold off in a rush to free up cash or near cash to meet pressing obligations.
That, however, was a one day phenomenon. On August 10, the prices of both metals turned and stormed right back upwards again, not recovering all of their losses on the previous day, but recovering most of them. And while that was going on, an even more potentially dangerous development was unfolding.
The most ominous development of the past week - for the financial powers that be (all of them) who dread the precious metals as a possible alternative "safe haven investment - is shown in the table below. This is the record of a sudden SURGE in Gold "lease rates" on the London Gold market on August 8-10.
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(Chart appeared in original analysis)
This chart shows the Gold lease rates since the end of 2002, a period which covers nearly all of the current $US Gold bull market. As you can see, the rates have been both amazingly low and amazingly "steady" throughout the nearly five years which this chart covers. As you can also see, the "spike" in lease rates produced by the data in the table above is the most sudden and most precipitious of the entire period.
We started our coverage of the now headlong "flight into liquidity" two weeks ago with these words:
"The NEXT stage in this debt aversion contagion is when the "safety" of government debt paper comes into question. Gold has sold off this week, partially as a knee-jerk flight into "liquidity" (the "liquidity" of paper IOUs) and partially in an orchestrated effort to debunk any alternative to the "liquidity" of paper IOUs. That always happens in the initial stages of a mistaken "flight to quality". Later, a realisation dawns as to where the real financial "quality" is. There's no way of knowing how long that will take, but THAT'S when the flight to liquidity becomes a flight to Gold - and REAL goods."
The concern over the viability of $US denominated paper "assets" has clearly spiked up another BIG notch this week. Gold is still being sold off in the rush for "liquidity", but is snapping back immediately. Now, at the same time as the Central Banks are desperately pumping up the liquidity available to the paper markets, the "liquidity" available in the Gold - LEASE - markets has begun to dry up. Granted, the lease rates are still absurdly low, but they have suddenly spiked over the past three days.
Should this spike continue, it is going to get MUCH more difficult for the participants in the Gold "carry trade". And if that happens, it is going to get difficult, and then impossible, to use the markets for paper claims to Gold to continue to keep the futures price of REAL Gold (and Silver) under control.
$US 5 x 5 Gold Point And Figure Chart:
When Gold closed above the $US 670 level - at $US 673.70 on July 18, this chart turned UP again. It then rose to $US 680 on July 19. The spot future close of $US 660.10 on July 27 was not enough to cause a downturn on this chart. Nor was the $US 661.40 close on August 9.
Please note the new all time high in the Yen Gold price set on July 20
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