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Since July 2008, the dollar has staged its most dramatic rally in years. However, from a fundamental standpoint, the dollar’s position has worsened significantly.
Let’s start with the bailouts.
The US already had $9 trillion in debt on its balance sheets before the Federal Regulators started nationalizing the mortgage and banking industry. When they took over Fannie Mae and Freddie Mac, they added an additional $5.2 trillion worth of potential liabilities in the form of mortgages to this mess.
Now, obviously not all of Fannie/ Freddie’s mortgages are junk. However, both companies’ managements have already admitted that at least $1.2 trillion worth of these mortgages were subprime or Alt-A (garbage).
If anything, they’re probably understating the amount of junk they own. During the housing boom, smaller, regional financial firms typically kept the best mortgages to themselves. The junk¾ or lower quality mortgages¾ were usually pawned off on Fannie/ Freddie. Because of this, I believe it’s safe to assume $2 trillion worth of their mortgages are no good.
That puts the US debt at around $11 trillion: close to its total GDP.
Then there’s the $85 billion nationalization of AIG, the insurance giant. Most people think this was a one-time deal for $85 billion. However, the government has already loaned AIG an additional $37.5 billion, which puts the tag at over $100 billion.
Aside from this, AIG has over $441 billion worth of credit derivatives on its balance sheets. If you’re unfamiliar with credit derivatives, these are the unregulated, opaque financial instruments that got Wall Street into trouble in the first place back in July 2007.
The reality is no one knows whether any of these are good or bad. But considering the fact AIG had to be nationalized in the first place, it’s highly likely a considerable amount of them are garbage. By nationalizing AIG (or at least 80% of it) the US government has taken on the burden of these securities. So add another half a trillion dollars in liabilities to the US balance sheet.
And then there are the money printing presses…
If you annualized the rate of money printing the Feds have maintained during the last four weeks, the total US monetary supply would more than triple in the next 12 months. Eventually¾ and I cannot tell you when because it’s impossible to know¾ banks will stop hoarding this money and it will spill over into the general economy. When it does, we’ll enter a period of hyper-inflation never before seen by the US. When this happens, dollar’s rally will not only end, the dollar will hit new lows never before seen.
In light of this, I strongly urge you to buy physical gold now while the paper gold markets are keeping the price low. As you know, there are two markets for gold: the “paper” market and the bullion market. The recent drop in gold prices has everything to do with the former and nothing to do with the latter¾ the bullion markets are extremely tight due to demand. “Paper” gold has been hammered because of two trends:
- Institutional liquidations
- The dollar’s rally
Funds have to liquidate their positions in order to meet these redemptions. And mutual funds have been hit with $967 billion in redemptions since the beginning of 2008. Gold¾ which the stock-centric crowd never really believed in anyway¾ was one of the first items to go. And since the “paper” gold market is relatively small¾ the total value of gold on the Commodity Exchange in New York (COMEX) is only $5 billion¾ it doesn’t take much capital to crush gold in the “paper” markets.
As for the dollar’s rally, I’ve laid out precisely why this will be short-lived at the beginning of this piece ¾ the Fed’s interventions AND the hyperinflationary money printing. I don’t know when the dollar rally will end, but looking at its recent action¾ it staged its largest single one day drop against the euro since 1999¾ it may be coming sooner rather than later.
Simply put, the dollar will eventually roll over. When it does, gold will erupt higher. The bullion market is already red hot. The dollar’s rally has been the last obstacle to a renewal in the bull market in gold.
Best Regards,
Graham Summers
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