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Tight Credit=Higher Gold

-- Posted Thursday, 30 August 2007 | Digg This ArticleDigg It!

By James West



The evolving metamorphosis underway in world financial markets is nothing more than the global re-allocation of available cash. The artificial liquidity created by government counterfeiting and accompanying facile lending policies is/was unsustainable, and the collapse of the sub prime mortgage business is merely the first symptom in what will continue to reorder the economic universe.


Several trillion dollars of imaginary money are in the process of evaporating.


Much like the dot com meltdown earlier this decade, the money disappearing never really existed in the first place, and was merely the novel creation of a bunch of fraternity brats who smirk at the tenets of classical economics.


The smirk is largely there to mask their ignorance of sound economic theory, but it is also emblematic of the disdain that those who govern and mange harbor towards those who are governed and managed.


Stemming from the fear that they might not actually be superior to those below them, and subsequently undeserving of the vast riches they hoard and squander, it’s the attitude of those borne into the wealth and privilege they are bound to abuse.


History repeats itself once again.


Derivatives – financial instruments derived from other securities – are once again the bain of Joe Average investor’s existence. Default credit swaps. Collateralized Debt Obligations. Its enough to make one ill.


But there are days of smug satisfaction ahead for Joe Average.


The upside about NOT  participating in the ethereal world of Money Markets and Derivatives is that you won’t suffer the immediate effects of tight credit because you (hopefully) don’t leverage your assets 10:1.


If the bank that does allow you to operate on a leveraged basis decides that your maximum safe ratio is 3:1, then obviously the dollar value of your participation in global markets has diminished by a factor of 7.


There are several investment organizations who are now the less than ecstatic recipients of pretty substantial margin calls. This is essentially the outcome of the diminished risk the bank is willing to take.


And that is going to be the cause of the continuing vaporization of liquidity. As the proverbial ball of dung rolls downhill gathering speed, it quashes and besmirches all in its path while growing in size, using the victims to augment its mass and momentum.


The ‘governments’, essentially the largest organized crime group on the planet now, have the money presses working overtime to counter the liquidity flight with more inflationary liquidity. Picture a roaring fire. Picture trying to douse the flames with naphtha gas.


But it will affect you down the road. And that’s why its important to understand now the correlation between tightened credit and a higher gold price.


If you entertain in your mind the idea that all of the currency prices quoted are quoted relative to how much gold they can buy ( and this in fact is reality, even if you don’t buy it yet), then you can easily see that a nation that requires $650 of its dollars to buy one ounce of gold is going to need more dollars every time it prints more money.


The massive currency devaluation that occurs every time the United States government injects 50 billion dollars into the economy will ultimately equate to upward pressure on the gold price. Other governments are forced to mimic the U.S. inflationary remedy in order to preserve their own market liquidity, else suffer diminished competitiveness’ through the effects of US counterfeiting.


Down here on the ground, where its highly unlikely we will be able to fabricate our own complicated financial instrument to sell to poor dupes through a vast complicit network of shops (banks)  and ad agencies (media), our only defense is to accumulate gold now, while it only does take $650 of our dollars to get an ounce.


When it takes $1,000 to get an ounce, we will have made money, and preserved capital. Those who don’t…well….you get what you pay for.


The realization will spread in spite of the concerted effort by a growing minority to suppress the price of gold. Those who have a vested interest in gold’s devaluation are still able to spook investors by dumping $50 Billion into the market shorting gold, but they do so only because its cheaper than capitulation, and the historic humiliation that would be the resulting legacy.


Junior mining companies have historically provided good leverage to the price of gold, but the junior markets of the last couple of weeks make now sense, and are not an accurate reflection of value.


That sucking sound coming out of the junior markets is coming from 2 places:


  1. Coventree Inc, and agencies like it, are defaulting on their ABCP (Asset Backed Commercial Paper), which is held widely by resource companies as a superior instrument to the more conservative Term Deposit. Every day, another mining and/or oil and gas exploration firm announces the inability to access funds on deposit with Coventree and others.


In classic financial psycho-babble, Coventree issued the following statement this week:


While Coventree sponsors and administers these ABCP conduits, the ABCP issued by them are not obligations of Coventree or guaranteed by Coventree. The assets in such Coventree-sponsored conduits are not owned by Coventree and therefore cannot be used by Coventree in its business nor are they available to meet the obligations of Coventree to its creditors. Similarly, the liabilities of such Coventree-sponsored conduits are not obligations of Coventree – the recourse of the debtholders of a conduit is generally limited to the assets of

that conduit.”


In other words, we sold it to you, but we aren’t responsible. Even though the principles of the company are ex-employees of Dominion Bond Rating Services, the company that gave the ABCP its R1, or triple ‘A’ status.


You can bet there’s either going to be a huge investigation into this relationship, or else a huge cover-up.


  1. The major funds, and the investment institutions behind them are generally leveraged at some huge ratio. As discussed above, many of those rations have been quietly yet irrevocably diminished by the holders of risk further up the food chain.


The standard reaction from any portfolio that gets a margin call is intense and indiscriminate selling. Witness the last week, and the resulting fire sale prices of gold ounces in the ground.


So buy gold. Buy lots. Buy it now. Then buy the juniors with ounces in the ground. Regard all investment advice as suspect. If it doesn’t make sense, don’t do it.


In the words of J.P. Morgan,


                “Gold is money. That’s it.”


-- Posted Thursday, 30 August 2007 | Digg This Article


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