Shades of the 1930s : Baling out Fannie and Freddie
Yesterday investors poured $1.4 billion into the fund in a single day and boosted gold bullion held by the US ‘StreetTRACKS’ Exchange Traded Fund ‘GLD’ by 7% from 660 tonnes to 706 tonnes. In The Goldwatcher pages 33 to 39 Neil Behrmann explains the advantages of using Exchange Traded Funds for gold holdings. Thanks to Nick Laird for the above chart reflecting gold held in the fund and the gold price since the launch of the fund in November 2004.
I can suggest several reasons that would have motivated investors to buy gold yesterday. Anxiety over a military conflict with Iran was certainly one. Speculators are differently motivated but I can’t think of any situation that would have motivated an investor to sell gold now.
The seriously ominous development motivating investors to buy gold now is, in my opinion, the widespread realisation that the US Government Sponsored Entities Fannie Mae and Freddie Mac (F&F) are insolvent. They won’t go out of business as any private enterprise in their situation would. Uncle Sam will have no option other than to paper over the cracks by printing money as necessary to keep them afloat and, if necessary, will print money to bale them out financially.
Insurance against the unthinkable:
Readers with a copy of The Goldwatcher will find analysis on how far US house prices can still fall on pages 145/6. From this analysis it’s clear that on its own a bale out won’t transform F&F into sound enterprises while house prices continue to fall. The situation will be like the one Roosevelt faced when he was elected President in 1933 that resulted in him devaluing the dollar from $20.67 to $35 per ounce of gold a year later. Commentary in pages 62-66 covers these events.
A knee jerk response to a suggestion that the F&F debacle will be as disruptive as the banking crash associated with the Great Depression may be that outrcome is unthinkable. Page 8 of The Goldwatcher spells out why gold comes into its own as insurance against the unthinkable and why we need insurance against the unthinkable.
Crunch time:
After years of objectively following gold, the dollar and global economic developments I sense now that the F&F crisis is hastening crunch time for the dollar. This posting will be extended with further analysis on the F&F crisis and other factors driving the gold price.
# 14th June 2008:
Nouriel Roubini on comrades Paulson and Bernanke:
Emergency plans to bale out F&F were announced by US Treasury Secretary Paulson yesterday, Sunday. The Goldwatcher posting on other factors affecting the gold price will be be modified to accomodate this expected but exceptional development dramatically reinforcing the case for owning gold.
Professor Nouriel Roubini first predicted the insolvency of F&F two years ago. Readers are advised to read Nouriel’s posting today on his Eonomonitor blog with commentary on the bale out. His concluding comment is unambiguous: (emphasis included by The Goldwatcher)
So let’s call a spade a bloody shovel: nationalise Freddie Mac and Fannie Mae. They should never have been privatised in the first place. Cost the exercise. Increase taxes or cut other public spending to finance the exercise. But stop pretending. Stop lying about the financial viability of institutions designed to hand out subsidies to favoured constituencies. These GSEs were designed to make losses. They are expected to make losses. If they don’t make losses they are not serving their political purpose.
So I call on Secretary Paulson, Chairman Bernanke and Director Lockhart to drop the market-friendly fig-leaf. Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA. Granted, the US version of socialism is imperfect thus far. The federal authorities have mainly intervened to socialise the losses in the financial sector while allowing the profits to continue to be drained off into selected private pockets. But that is bound to be an oversight. It surely cannot be the intention of such committed Marxists to target taxpayer-funded largesse solely at the very rich and at a few favoured, electorally sensitive constituencies. Fannie and Freddie are, or will be, safe in the hands of comrades Paulson, Bernanke and Lockhart.
The Goldwatcher blog following Nouriel’s analysis reads: ‘Yes Nouriel - your extraordinary insight is validated again. Thank you. But what’s missing is what we should do to protect ourselves against the fallout. Buy gold. We look forward to your comments on this in future. John Katz.
