As we have been pointing out ever since it happened, both in these commentaries and the The Privateer itself, the big turnaround in the US Dollar, commodity prices and the financial sector of global stock markets has taken place in the two months since the US Treasury appealed for and then got a "Housing Bill" out of Congress which allowed them to, for all intents and purposes, nationalise the two giant GSEs, Fannie Mae and Freddie Mac. Last weekend, the Fed formally "took over" (the polite word is "conservatorship") Fannie and Freddie and the result was an acceleration in the commodities bloodbath and a US Dollar which completed regaining all the losses it had sustained since the beginning of the global credit-crunch with the subprime crisis in August last year. On September 11, the spot future Gold closing price dipped below the $US 750 level while the US Dollar trade weighted index - the USDX - closed above the 80 level for the first time since early September last year.
Now, analyses are starting to emerge dealing with what has happened since the Fannie/Freddie bailout plan emerged two months ago. Here is one good example from the 321Gold website - The real reason commodities are tumbling. We are in agreement with the conclusions reached here. What we are not so "confident" about was whether this was a "brilliant ploy" or a desperate manoeuvre which happened to work - probably far better than the wildest dreams of those who conjured it in the first place. No matter on the surface. Work it did, and it continues to work as the crash dives in commodities and precious metals - Gold and ESPECIALLY Silver - this week illustrate.
In March, the Fed bailed out Bear Stearns. This rescued the US Dollar - the USDX was threatening to go below 70 - and tumbled Gold off its audacious perch just above the $US 1000 level. In mid July, with the US Dollar tumbling again and Gold nearing $US 990 came the Fannie/Freddie bailout. Each successive bailout wrong footed the hedge funds and leverage traders which had to reverse their "bets" with unseemly haste. The more recent bailout had a much greater effect in this direction and the reversal was both bigger and more desperate. Hence the HUGE tumbles in commodities and in stock markets, especially resource-based stock markets, over the last month and especially since the beginning of September.
The first bailout pushed Gold from $US 1000 to $US 790. The second and bigger one pushed Gold from just below $US 990 to just below $US 750, the low it hit on September 11. The US monetary authorities had no choice in either bailout. To let Bear Stearns go under would have exposed the REAL valuations of $US TRILLIONS worth of ultra-leveraged credit derivatives of all descriptions. To let Fannie and Freddie go under would have endangered the entire complex of US Dollar denominated debt paper, up to and including the "reserves" of the global financial system, US Treasury debt paper.
Each bailout has been forced on the US Treasury and the Fed. Each was for higher stakes. With recessionary and deflationary data cropping up all over the world and in the US REAL economy in particular, the huge pressure on the financial giants of Wall Street continues to intensify. Mr Paulson and Mr Bernanke both vehemently stated on September 12 that they had NO plans to bail out Lehmann Brothers. They said exactly the same thing about Bear Stearns and about Fannie and Freddie. Lehmann is almost certain to implode without immediate financial assistance according to even the most starry eyed Wall Street pundit. Add to that two other giant US financial entities, the world's largest insurer AIG and the biggest credit union in the US - Washington Mutual or WaMu. The situation simply is NOT improving. Instead, it continues to worsen.
Was the Gold rebound and the HUGE dive of the US Dollar on September 12 the beginning of the reversal? It is too soon to tell. We are in the worst of all possible worlds (with apologies to Voltaire) at present. The REAL situation in the US economy is worsening rapidly with both wholesale and retail sales declining in the midst of accelerating price FALLS. At the same time, there is a Presidential election on with neither candidate willing to broach ANY important economic issue and both offering "solutions" which will make the problem MUCH worse.
(Chart appears here in original analysis
As you can see, the price action on this chart has now taken Gold well below the uptrend line which has supported the entire bull market from 2002 to date. We also have descending lows on the chart - the $US 1000 high set in March and the $US 975 high set in mid July. With the rebound two weeks ago, the price action once again moved above the uptrend line. Now, with Gold all the way down to the $US 750 level on this chart, we have no obvious support levels. A close of $US 775 or higher is now necessary for an upturn on this chart.
We began the table below in 2007 and have extended it into 2008, even though Gold in all four currencies in the table remain well above their 2006 highs. Gold breaking out to new all time highs in $US terms at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold improved upon those January levels in all four currencies as spot future Gold closed above the $US 1000 level for the first time ever in the middle of March.
Only six weeks ago, we had a new entry on the table for the first time since Gold topped the $US 1000 level in March. On July 17, Gold rose to 103233 Yen. That's was a new 2008 high for the metal in terms of the Japanese currency. Then the Fannie/Freddie bailout plan went to work.
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