And so it begins. The global printing
presses are now running full tilt in the most historic liquidity event ever. As
I have been cautioning my readers over the past month or so, in any liquidity
driven crisis event, gold would not be spared and we saw the initial reaction
lower on the news that came off the wires just a short moment ago.
In essence the Governing Council of the
European Central Bank (ECB) has decided, in what is being deemed as a
coordinated effort with the Federal Reserve, the Bank of England, the Bank of
Japan and the Swiss National Bank to conduct three US dollar
liquidity-providing operations with a maturity of approximately three months
covering the end of the year. These operations will be conducted in addition
to the ongoing weekly seven-day operations announced on 10 May 2010.
This action will take the form of
repurchase operations against eligible collateral and will be carried out as
fixed rate tender procedures with full allotment. Further information on
tender procedures can be found on the ECB’s website.
Short term this saves the Euro from the
collapse it was facing just last week. It also officially reinforces the view
that the banks around the world are pretty much insolvent given their
exposure to the mounds of toxic debt, more aptly known as sovereign debt.
Funny how governments and banks are broke because they lent money out to
other banks and governments?
The illusion this paints is one of a
massive global bailout of the financial system. The implications for gold are
yet to be seen. I do believe that longer term the inflationary response to
these measures will be unavoidable however, gold,
seen as a crisis store of wealth sold off sharply on the news. Short term
crisis averted which means there is no reason to hold gold right now.
However, the other aspect of it is that we can expect to see gold being sold
in an effort to shore up additional liquidity.
The ECB said it would hold three
separate operations between October and December to help see banks through
the year-end period. As an American, Brit or citizen of any non-Euro nation,
how do you feel knowing that your central bank is printing dollars at your
children's’ future’s expense so that it can bail out banks from
other parts of the world? This is what we get in a world of global economic
collaboration when every bank is somehow tied to each other through invisible
lifelines. Point being, if one major institution goes down, others will fall
like dominos given that they have all lent money to one another via exotic
instruments in order to keep the global banking ponzi
Always look beyond the real picture
ladies and gents. It all looks like it might be find
and dandy now, however, imagine the true rot in the system if world central
banks had to coordinate such an historic bailout.
‘Atta boy Ben! The Federal Reserve
just backstopped a massive loan to European banks to keep them solvent. Hint
2: How closely tied are American financial institutions to the European banks
needing the bailout for the Fed to take such measures overseas?
The problems are literally being papered
over but the reality is that the situation is much graver than you think. I
liken it to the doctor telling you everything is fine while calling you out
of the blue to see you the next day for a check-up. Meanwhile, the secretary
is calling your family and asking them to get ready to make funeral arrangements.
What’s next? Expect the Bank of
Japan to intervene in the currency markets soon as the YEN’s historic
values are starting to choke the Japanese economy. You thought the Swiss Bank
intervention was huge? Just wait.