The Goldwatcher

Can smart central bankers protect us from the nasty effects of a stock market collapse?

 Foreign Policy : September 2000 : Contribution from Dr.  Ben S. Bernanke, at the time Professor of Economics and Public Affairs and Chair of the Department of Economics at Princeton University:

  ’A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? …..After the 1929 crash, the Federal Reserve mistakenly focused its policies on preserving the gold value of the dollar rather than on stabilizing the domestic economy.…………The downturn following the collapse of Japan’s so-called bubble economy of the 1980s was not as severe as the Great Depression. However, in some crucial aspects, Japan in the 1990s was a slow-motion replay of the U.S. experience 60 years earlier………..‘Central bankers got it right in the United States in 1987 when they avoided deflationary pressures as well as serious trouble in the banking system. In the days immediately following the October 19th crash, Federal Reserve Chairman Alan Greenspan—in office a mere two months—focused his efforts on maintaining financial stability…..Reassured by policymakers’ determination to protect the economy, the markets calmed and economic growth resumed with barely a blip. There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. ….History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse…..’

 Does gold protect? 

 On Wednesday 1^st August. US Global Investors’ CEO & CIO Frank Holmes will present a Webcast with noted precious metals analyst Paul Burton, Editor and Publisher of World Gold Analyst. The subject is: 

‘GOLD : SURVIVING OR THRIVING’ The gold market today and important considerations about its appropriatness in a diversified asset allocation.

You can register now to follow the Webcast live - or listen to a recording afterwards.

Frank Holmes is also co-author of The Goldwatcher being published by John Wiley & Sons Ltd early in 2008  

The last Goldwatcher posting  ‘And if America falters? Uh-Oh’  quoted US Treasury Secretary’s Paulson’s warning:  ‘We haven’t had a global financial shock since 1998. …When we do have one - and it’s when, not if; …we’ll be seeing for the first time how some of these instruments perform under stress.’  The Webcast Gold Surviving or Thriving is likely to shed light on gold in times of stress.

         As good as it gets   

       This week’s Fortune magazine features an article on THE GREATEST BOOM EVER.  It’s about as good as it gets right now. The last time growth was as good as this was 1970 to 1973 when world GDP was $13 trillion and the world grew at a 5.4% average rate.  From 2003 to 2007 growth is projected at 4.9% and the GDP of the global economy is more than $36 trillion.  Three charts included in the Fortune article reflect:  # growth in world GDP and world trade;  # the surging commodities index; and   # surging GDP per capita growth in emerging economies.Together these charts  support a compelling case for us to put money to work where the action is. Why would anyone want to buy sterile gold that costs money to keep when we can have all our money in financial investments driven by real world growth dynamics?  Two good reasons appear in  the Fortune article. One is in the headline : ‘OK OK a lot could go wrong.’ The other is the headline above another three charts that reflect: # the gaping US current account deficit; # US household debt at 140% of personal income; and $ 250 billion loaned to companies with ‘junk’ credit ratings.The headline for these charts: ………………………AND IF AMERICA FALTERS – UH-0H 

The next derivatives crisis – not if but when 

US Treasury Secretary Henry Paulson is quoted in the Fortune article commenting on the strongest global economy he has seen in his lifetime. But Paulson also has this to say on risk:  ‘We haven’t had a global financial shock since 1998. I believe that these large and dramatic increases in private pools of capital [hedge funds and private equity] and in the credit derivatives markets since then have helped manage and disperse risk and make the economy more efficient. When we do have one ( a global financial shock) - and it’s when, not if; that’s not me being negative, it’s just that we’re not going to defy economic gravity - we’ll be seeing for the first time how some of these instruments perform under stress.’ 

Sub Prime Mortgages and CDOs: Prime suspects for a derivatives crisis: 

Most of us had never heard of CDOs until a few months back and are still  learning. Paul Tustain of Bullion Vault has written an excellent and revealing article on the CDO story ‘Investment  Landfill – How Professionals Dump their Toxic Waste on You.’   In 1998 when the US Federal reserve facilitated the bail out of the hedge fund Long Term Capital Management to prevent financial markets from ‘seizing up’ $3.65 billion was required. A sub prime CDO spectacular  now could involve trillions.  We don’t know how some of these new financial instruments will perform under stress. But we do know how gold will.  Bullion Vault’s formula for buying, storing and selling gold is state of the art, secure  and cost effective.