As the Credit Crunch Worsens, It will Send the
Gold Price Up, The $ Down
By: Julian Phillips, Gold Forecaster - GoldForecaster.com
Friday, 14 December 2007
Why are the banks hurting so much?
In the U.K. banks have asked top U.K. corporate clients not to draw on lending facilities to
which they are entitled in order to preserve their balance sheets as they approach the financial
year-end. The banks are urging some of their biggest clients not to draw on standby credit
facilities as the sub-prime crisis and squeeze on interbank lending have affected banks' ability
to fund themselves. The problems started with the closure of the commercial paper market as
a means of cheap funding for companies in the summer. Banks have to provide standby
financing of up to 100% to backstop commercial paper programs. With banks struggling for
their sources of financing through the interbank market, drawdowns are having a direct effect
on their balance sheets. Several bankers have said Citigroup is one of those most affected
and that the bank was asking some clients not to use standby facilities, which are part of the
normal relationship banking arrangements made between banks and companies. By the end
of the summer, the principal problem facing banks was not U.S. sub-prime or collateralized
debt obligation exposure but the drawing down of standby loans and bi-laterals. In some
cases banks are seeking to avoid further balance sheet capital pressure by asking clients not to
use their standby facilities.
Standby financing is typically for 364 days and when un-drawn has a zero risk weighting.
When it is drawn, the risk weighting goes to 100%. This makes the sums involved
significant. If a company is unable to tap the markets for commercial paper to the tune of, say,
Pounds 4 billion (€5.6 billion), banks may have to provide that amount in standby financing.
Tightening credit can and does spawn inflation.
And the problem is snowballing as institutions from State government level right through the
banking system are tightening credit. This is an alarm signal in itself, for inflation is at its
most dangerous, once it drives money supply to fill the gaps caused by tightening credit.
This was the principal trigger for the hyperinflation in Germany’s Weimar Republic after the
first World War until August 1923.
So how do things look as we move forward into the deep of winter? Fed Chairman Ben
Bernanke and Vice Chairman Donald Kohn acknowledged the threat to spending from
reduced access to credit had moved from the ‘roughly balanced’ October assessment for
growth and inflation risks, to the point where expectations for the Fed to lower interest rates
again on December 11th are strong. The outlook has been “importantly affected over the past
month by renewed turbulence in financial markets,'' Bernanke said, “Officials must judge
whether the outlook for the economy or the balance of risks has shifted materially.
Uncertainty surrounding the outlook is even greater than usual, requiring the Fed to be
exceptionally alert and flexible. The combination of higher gas prices, the weak housing
market, tighter credit conditions, and declines in stock prices seem likely to create some
headwinds for the consumer in the months ahead.'' Federal funds futures show traders see a
100% chance of a reduction in the benchmark rate next month, with a 30% probability of a half-
point move. The resurgence in credit concerns is spawning safe-haven buying of gold was
evident in the behavior of credit spreads in and out of the U.S. One-month LIBOR remained
75 basis points over Fed funds; given that the historical spread of LIBOR to Fed funds is flat or
even negative, this indicates not only a reluctance by banks to lend, even to each other, but
also a general rise in the search for a safe haven. European and U.K. lending rates have risen,
indicating a similar flight from risk in the global economy. Meanwhile, investors continued to
move into U.S. Treasuries, with yields on U.S. government securities retreating back to very
near recent lows. Persistently high interbank rates are a clear sign that investors and financial
institutions are unhappy, very unhappy.
Carry Traders increasing velocity.
“Carry Trade” traders have to find interest arbitrage opportunities [borrow cheap in one
market – lend expensive in another] or they don’t make money. So they have to be accepted
as a fact of life in today’s global money systems, constantly placing pressure on such
differentials. They are very quick to act and cause an increase in the dealing ‘spreads”, which
affect the cost of the operation making profits that little bit more difficult to achieve. If they
act as one, on an opportunity they have sufficient clout to affect a stock and market badly.
They, alongside the new Soros-like speculators, give height and weight to Capital Tsunami
flows, which is fine so long as the markets can bear it. But they will bring to light any
weaknesses in the global money systems and exploit them. They have the punch to make
nations impose Capital and Exchange Controls.
Official Actions
We have run a constant story on the dangers of Capital and Exchange Controls, which are the
consequence of markets buckling under such pressures. We constantly keep our eyes open
for signs of “Official” intervention to stop the holes showing up in the system in the face of the
huge weight of money swamping this way and that in the system, or where a lack of it makes
new holes. When watching out for these, we see that local mortgage companies fall into the
global market, with ideas in the States being copied in other countries and other countries
investing in local mortgage companies through the American banking inspired Structured
Investment Vehicles. And these investments vehicles are hurting the global banking system
[excluding China it seems] by plummeting in price, giving us signals that “Official”
intervention is happening or about to happen. Here are some of the latest signals and
actions:
Consequences
What this means in essence is that we will see dropping interest rates, liquidity being pumped
into the system and inflation taking off. The ‘carry’ traders will position themselves [as they
are now doing] to borrow the $ and lend into higher interest rate currencies [the € even] to get
their returns, as the $ drops down to give capital gains on the transactions. It will be like a red
rag to a bull. This renews pressure on the exchange rate level of the $ and precipitates
competitive devaluations in other currencies so importing U.S. inflation. As long as the
problems persist matters will get worse for the $ in particular and gold will rise.
The effect on gold?
As this happens, expect to see gold rise faster than currencies fall, as more and more people
want the protection gold offers.
If the government’s efforts to support the banking and credit systems are not successful [really
convincing] the pressures on the banks and credit systems will grow worse and this time will
expose the real losses being made, across the globe, exacerbating the whole banking situation
in the global money system. The attraction of gold will then be irresistible!
Gold Price Up, The $ Down
By: Julian Phillips, Gold Forecaster - GoldForecaster.com
Friday, 14 December 2007
Why are the banks hurting so much?
In the U.K. banks have asked top U.K. corporate clients not to draw on lending facilities to
which they are entitled in order to preserve their balance sheets as they approach the financial
year-end. The banks are urging some of their biggest clients not to draw on standby credit
facilities as the sub-prime crisis and squeeze on interbank lending have affected banks' ability
to fund themselves. The problems started with the closure of the commercial paper market as
a means of cheap funding for companies in the summer. Banks have to provide standby
financing of up to 100% to backstop commercial paper programs. With banks struggling for
their sources of financing through the interbank market, drawdowns are having a direct effect
on their balance sheets. Several bankers have said Citigroup is one of those most affected
and that the bank was asking some clients not to use standby facilities, which are part of the
normal relationship banking arrangements made between banks and companies. By the end
of the summer, the principal problem facing banks was not U.S. sub-prime or collateralized
debt obligation exposure but the drawing down of standby loans and bi-laterals. In some
cases banks are seeking to avoid further balance sheet capital pressure by asking clients not to
use their standby facilities.
Standby financing is typically for 364 days and when un-drawn has a zero risk weighting.
When it is drawn, the risk weighting goes to 100%. This makes the sums involved
significant. If a company is unable to tap the markets for commercial paper to the tune of, say,
Pounds 4 billion (€5.6 billion), banks may have to provide that amount in standby financing.
Tightening credit can and does spawn inflation.
And the problem is snowballing as institutions from State government level right through the
banking system are tightening credit. This is an alarm signal in itself, for inflation is at its
most dangerous, once it drives money supply to fill the gaps caused by tightening credit.
This was the principal trigger for the hyperinflation in Germany’s Weimar Republic after the
first World War until August 1923.
So how do things look as we move forward into the deep of winter? Fed Chairman Ben
Bernanke and Vice Chairman Donald Kohn acknowledged the threat to spending from
reduced access to credit had moved from the ‘roughly balanced’ October assessment for
growth and inflation risks, to the point where expectations for the Fed to lower interest rates
again on December 11th are strong. The outlook has been “importantly affected over the past
month by renewed turbulence in financial markets,'' Bernanke said, “Officials must judge
whether the outlook for the economy or the balance of risks has shifted materially.
Uncertainty surrounding the outlook is even greater than usual, requiring the Fed to be
exceptionally alert and flexible. The combination of higher gas prices, the weak housing
market, tighter credit conditions, and declines in stock prices seem likely to create some
headwinds for the consumer in the months ahead.'' Federal funds futures show traders see a
100% chance of a reduction in the benchmark rate next month, with a 30% probability of a half-
point move. The resurgence in credit concerns is spawning safe-haven buying of gold was
evident in the behavior of credit spreads in and out of the U.S. One-month LIBOR remained
75 basis points over Fed funds; given that the historical spread of LIBOR to Fed funds is flat or
even negative, this indicates not only a reluctance by banks to lend, even to each other, but
also a general rise in the search for a safe haven. European and U.K. lending rates have risen,
indicating a similar flight from risk in the global economy. Meanwhile, investors continued to
move into U.S. Treasuries, with yields on U.S. government securities retreating back to very
near recent lows. Persistently high interbank rates are a clear sign that investors and financial
institutions are unhappy, very unhappy.
Carry Traders increasing velocity.
“Carry Trade” traders have to find interest arbitrage opportunities [borrow cheap in one
market – lend expensive in another] or they don’t make money. So they have to be accepted
as a fact of life in today’s global money systems, constantly placing pressure on such
differentials. They are very quick to act and cause an increase in the dealing ‘spreads”, which
affect the cost of the operation making profits that little bit more difficult to achieve. If they
act as one, on an opportunity they have sufficient clout to affect a stock and market badly.
They, alongside the new Soros-like speculators, give height and weight to Capital Tsunami
flows, which is fine so long as the markets can bear it. But they will bring to light any
weaknesses in the global money systems and exploit them. They have the punch to make
nations impose Capital and Exchange Controls.
Official Actions
We have run a constant story on the dangers of Capital and Exchange Controls, which are the
consequence of markets buckling under such pressures. We constantly keep our eyes open
for signs of “Official” intervention to stop the holes showing up in the system in the face of the
huge weight of money swamping this way and that in the system, or where a lack of it makes
new holes. When watching out for these, we see that local mortgage companies fall into the
global market, with ideas in the States being copied in other countries and other countries
investing in local mortgage companies through the American banking inspired Structured
Investment Vehicles. And these investments vehicles are hurting the global banking system
[excluding China it seems] by plummeting in price, giving us signals that “Official”
intervention is happening or about to happen. Here are some of the latest signals and
actions:
- While the Fed is set to slow release $20 billion next week, $20 billion the week, with
more to come in the new year, the fact that all depository banks in America can draw
from it anonymously is designed to reach into all the corners of the U.S. banking system
and is a key feature to the ‘rescue’ plan. All U.S. banks can now use the “Term Auction
Facility”, which allows them to hand in a much wider set of investments as collateral to
raise money, including mortgage securities.
- Across the Atlantic, the Bank of England has to date injected Pounds 20 billion it is also
selling liquidity against even housing and credit card debt at rates far lower then 6.5%.
- The E.C.B. is releasing €13.6 billion.
- The Swiss National Bank is releasing $4 billion.
- In the U.K., the British government is passing a law to permit the nationalization of
Northern Rock, which was the 8th largest bank in Britain but one that has succumbed to a
‘run’ after suffering from an overdose of sub-prime related securities. This shows that
the government/Bank of England are the “lenders of last resort”. However, few
depositors and even fewer traders are inclined to wait on the painful process of
government support to protect their money. So we experience “runs” on banks of this
caliber, when it is discovered that their assets base comes under pressure.
- In the States the government is trying to have mortgages potentially in default, because
they are about to be hit with the full impact of market interest rates, frozen for 5 years.
Very noble and proper too! But the market wants to see the small print before they
accept these moves are really going to be capable of shoring up credit markets. Until
then the pressure remains on granting credit, resulting in a drying up of liquidity. But
you may well ask, why is the problem so great? The answer lies in the balance sheet of
the banks.
Consequences
What this means in essence is that we will see dropping interest rates, liquidity being pumped
into the system and inflation taking off. The ‘carry’ traders will position themselves [as they
are now doing] to borrow the $ and lend into higher interest rate currencies [the € even] to get
their returns, as the $ drops down to give capital gains on the transactions. It will be like a red
rag to a bull. This renews pressure on the exchange rate level of the $ and precipitates
competitive devaluations in other currencies so importing U.S. inflation. As long as the
problems persist matters will get worse for the $ in particular and gold will rise.
The effect on gold?
As this happens, expect to see gold rise faster than currencies fall, as more and more people
want the protection gold offers.
If the government’s efforts to support the banking and credit systems are not successful [really
convincing] the pressures on the banks and credit systems will grow worse and this time will
expose the real losses being made, across the globe, exacerbating the whole banking situation
in the global money system. The attraction of gold will then be irresistible!
| Gammill Numismatics, LLC presents "The GN Newsletter" Current Events and Collector News |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |