-- Posted Thursday, 22 January 2009 | | Source: GoldSeek.com
The Morning Gold Report by Peter A. Grant
Jan 22 a.m. (USAGOLD) -- Gold has adopted a consolidative tone in the wake of solid gains on Tuesday. A second consecutive inside day (higher low/lower high) has formed. However, the overall technical tone remains favorable after important resistances gave way earlier in the week.
News on the housing front remains grim. US home prices fell 1.8% in Nov-08, down 8.7% from the same period a year previous. Mounting foreclosure sales are exacerbating declinging home prices.
RealtyTrac reported that there were 3.1 million foreclosures in 2008. That's up 81% from 2007 and a startling 226% versus 2006.
If you subscribe to the theory that the economic crisis stems from the collapse of the housing market, and the crisis is only likely to moderate once housing prices stabilize, it would seem we are not at that point yet. The latest data are a grim reminder that we are caught in a vicious cycle.
As home prices continue to fall, more debt goes bad. As more debt goes bad, banks further tighten credit requirements lessening demand for homes. As credit gets tighter and home values fall, people spend less. As people spend less, more people lose their jobs. As more people lose their jobs, more homes go on the market and more debt goes bad. Home prices continue to fall. Rinse and repeat.
That's a bit of an oversimplification, but you get my point. There doesn't seem to be any relief in sight. The question becomes, how do you break the cycle.
Efforts by the government to mitigate the crisis have been ineffective to date, despite the astronomical numbers. However, the path they have chosen is a difficult one to turn back from.
It seems the new administration in Washington is going to stick with the plan. Massive monetary expansion and 0% interest rates to prevent broad-based deflation. Unfortunately, most of this money is going into the same banking system whose aggressive quest for yield and seemingly total disregard for risk precipitated the whole crisis.
George Cooper and I had a conference call the other day with a banking contact of his in Germany. He's been a banker for many decades and is one of the sharpest minds I get the pleasure to pick periodically.
We were talking about the recent worsening of the banking crisis in Europe and the UK. I proposed that historically conservative German and Austrian banks began taking on more risk in recent years to chase the yields that the aggressive upstarts were getting.
High risk, high return loan portfolios were driving share value. In order to be competitive and to attract investment, the German and Austrian banks sought these higher risk loans as well. All is great until the underlying assets in the portfolio begin to collapse and then the monster just feeds on itself until nothing is left.
The banker agreed with me, but also pointed out that the crisis was as much a result of ego as anything else. The big staid German bankers were being outdone/out-earned by the aggressive bankers.
Instead of waiting for the leveraged credit market to collapse, as I'm sure they suspected it must, they were seduced by the big bonuses and all they entailed with respect to their personal lifestyles. They forsook everything they had learned about risk and return from the elder statesmen of the business, like George's contact.
His final words on the topic where as follows: "The banker used to be the king of the businessmen. Today he is the king of the gamblers."
Don't think for a second that the attitude and ego is any different on our side of the pond. I've been on many a bank trading floor over the years and ego is one thing that is never in short supply.
Risk can be an addictive thing. Those that survive the current crisis are likely going to be back out there searching for yield again in the future. Probably a little more cautiously at first, but time has a way of dulling ones memory. Those with big egos are quick to assess blame elsewhere.
Of course there are many bankers out there that never really experienced pain during this crisis. Perhaps dented pride, but not true pain. The government quickly came to the rescue with bailout money -- despite the imprudent actions of the bank. When bad behavior is rewarded, said behavior seldom changes.
When the bill for all these excesses finally comes due -- and it will come due -- all of us are going to pay. That bill grows larger every day and the best one can do is seek to preserve wealth as best one can. Physical gold, held in your own possession has served that role for thousands of years.
