Now this is a correction. In the
space of three days gold is off 10% and silver 25%.
What's happening? Two things:
First, you don't get this kind of run
without this kind of correction. When something soars, the number of people
with huge embedded profits eventually reaches a tipping point where, for a
while, selling necessarily overwhelms buying. So regardless of what's
happening in the world, gold running from $300 to $1,900 and silver from $4
to $49 would create exactly this kind of volatility.
Second, all the borrowing we did to
stave off the 2008 debt crisis has created a new one, with Greece on the
verge of default and the US in trillion-dollar-deficit gridlock -- and a
realization that the people nominally in charge have no idea what they're
doing. Where new plans to create jobs or lower long term interest rates used
to be met with enthusiasm, they're now being met with disdain. This is huge.
In the space of a few months the dominant financial fear has shifted from
inflation back to deflation.
In other words, it's 2008 again, but
with much bigger debt numbers. Which takes us back to precious metals: Notice
on the chart below that gold got whacked the last time conditions were
deflationary. Between early and late 2008 it lost about 25%.
Then recall how the world's
governments reacted back then and note that they're all still armed with
printing presses and terrified of upcoming elections. If a Greek default
produces panic rather than relief, expect QE3 in the US and something similar
in Europe, where the ECB is already becoming a clone of the US Fed:
The European Central Bank may step up
efforts to boost growth and ease financial-market tensions as early as next
month, Governing Council members said.
Nowotny and Belgium's Luc Coene
said in Washington that potential measures include the reintroduction of
12-month loans to banks. Asked if an interest-rate cut is warranted, Coene said while that wouldn't help to bring down
longer-term borrowing costs, "the ECB has never ruled out things
"If the data in early October
shows that things are worse than we anticipated we will look at the kind of
decisions we have to take for that," he said in an interview late
European policy makers are under
pressure from counterparts around the globe as their failure to contain the
region's sovereign-debt crisis stokes concern the world is on the brink of
another recession. Their comments come as European officials debate how to
increase the size of their bailout fund to restore confidence in its
With money-market tensions
increasing, the ECB has already reintroduced a six-month loan and continues
to offer banks as much cash as they want at its benchmark rate in weekly,
monthly and three-month refinancing operations. It last conducted a 12- month
loan in December 2009.
"The ECB will probably discuss
reintroducing a 12-month tender," Nowotny told
reporters in Washington today. "We could perfectly do that when we feel
there is an urgent need for that -- I don't think so for the moment, but it
could be in two weeks," Coene said. The ECB
council next convenes on Oct. 6.
Economists at Barclays Capital,
JPMorgan Chase & Co. and Royal Bank of Scotland Plc
predict the ECB will also be forced to reverse course on interest rates after
raising them twice this year to curb inflation. The
benchmark rate is currently 1.5 percent, compared with near-zero for the U.S.
Federal Reserve and Bank of Japan, and the Bank of England's 0.5 percent.
Finance chiefs from the Group of 20
yesterday pledged a "strong and coordinated international response to
address the renewed challenges facing the global economy."
Many G-20 members pressed Europeans
to follow through on a July plan to expand the powers of the region's rescue
fund, Japanese Finance Minister Jun Azumi told
European parliaments are focused on
approving the July agreement to expand the scope of the 440 billion-euro
($594 billion) European Financial Stability Facility to allow it to buy the
debt of stressed euro-area governments, aid troubled banks and offer credit
lines. Its current role is to sell bonds to fund rescue loans for
"We really, really hope that it
will be up and running by mid-October, but you know yourself how problematic
the discussions in some countries are," Nowotny
said. After legal ratification, it may take another six to eight weeks for
the EFSF to start intervening, he added.
The ratification process has drawn
fire from some investors for being protracted and failing to provide the fund
with enough cash to prevent the crisis leaking beyond Greece. Curbing the
scope of policy makers to do more is the suspicion taxpayers in AAA-rated
countries such as Germany and Finland would balk at stumping up even more
That has fanned speculation Europe
may eventually ratchet up the fund's spending power, perhaps by using the
bonds it sells as collateral to borrow more cash from the ECB. Another
proposal is to mimic a U.S. program established following the 2008 collapse
of Lehman Brothers Holdings Inc. by allowing the fund to offer the ECB credit
protection for buying more sovereign bonds.
"It is very important that we
look at the possibility of leveraging the EFSF resources and funding to have
a stronger impact and make it more effective," European Union Monetary
Affairs Commissioner Olli Rehn said in Washington
yesterday. French Finance Minister Francois Baroin
said separately that policy makers "need the right firewall to prevent
contagion" and can discuss giving the fund "the necessary
Weidmann has said
he opposes turning the EFSF into a bank that can refinance itself at the ECB
as it would amount to "monetizing state debt." Coene
also said he's "not sure that will be a good idea."
reluctance to step up the central bank's government bond purchase program
even after the IMF said Sept. 20 the ECB "must continue to intervene
strongly" in European debt markets to "maintain orderly
It's impossible to overstate the
panic that the world's politicians and central bankers are experiencing. They
have no idea what's happening now that the magic power of easy money seems to
have failed. And because easy money is all they know, they will absolutely,
without the slightest doubt, double down in coming months, flooding the US and
Europe with credit.
Ironically, Europe's troubles
actually make it easier for the US to keep easing, because credit creation
depends on the willingness of the rest of the world to accept dollars. As
long as dollars are in demand -- as they are now, as capital flees the euro
in favor of US Treasury bonds -- the Fed can create more dollars and
Washington can continue to issue more debt. Expect them to ramp it up
big-time in the near future.
And politics doesn't matter. The idea
that president Mitt Romney or Rick Perry would accept a 1930s style
depression in order to balance the budget is laughable. Faced with the
prospect of becoming their generation's Herbert Hoover, they'll open the
monetary floodgates just as certainly as would a second-term Barack Obama. In
Germany, the recent bailouts may soon cost Chancellor Angela Merkel her job,
but as a reader commented on a recent DollarCollapse
Merkel is effectively losing one
election after another but she loses to the left. The German left is pro
integration and pro bailouts. In this weekend elections in Berlin, the
minority party of the current coalition, that can be
compared to the tea party, lost even the 5% quorum to have a
representation to congress. They campaigned against Europe.
In other words, the next generation
of European leaders will be hired by voters sick of austerity and will
therefore be even more favorably disposed to bailing out everyone in sight.
This is profoundly positive for
precious metals. As stomach-churning as this correction seems, a decade from
now it will look like just another squiggle in a long, steep uptrend.