Tax & Financial Consulting Services
Government Debt Rescue a Boom for Gold!
Treasury Secretary Paulson and Congress are hammering out details of the government's rescue plan for financial institutions, and we don't know what final impact it will have on the debt crisis. But I can tell you one thing — it's going to drive gold prices higher.
In this plan, the government is squirting out hundreds of billions of dollars through a fire hose. That is inherently inflationary and should pump up the price of gold.
And then there's the whole question as to whether this mega-bailout is going to work or not. I have my doubts. After all, here's just a partial laundry list of all the schemes the government has hatched in recent months to "save" the market ...
• The Bear Stearns takeover by JP Morgan, which was midwifed by the federal government (cost to taxpayers: $29 billion)
• Special Fed liquidity programs including the Term Lending Facility and Term Auction Facility ($200 billion)
• The Economic Stimulus package ($168 billion)
• The Federal Housing Administration's scheme to refinance failing mortgages into new, reduced-principal loans with a federal guarantee ($300 billion)
• The bailout for Fannie & Freddie (up to $200 billion)
• The bailout for AIG ($85 billion)
• Last week's decision to block short-selling of financial stocks
• The insurance program for money market funds (potentially $50 billion from the Great Depression era Exchange Stabilization Fund)
• Direct Treasury purchases of mortgage-backed securities ($10 billion)
• Another $300 billion injected into global credit markets on Friday
Add in the $700 billion proposed for the current bank bailout plan, $87 billion in repayments to JP Morgan Chase for providing financing to underpin trades with bankrupt investment bank Lehman Brothers, etc., etc., and I tally up over $1.8 TRILLION ... so far.
A flood of “fiat”dollars into the system lowers the value of dollars. It's simple supply and demand. Since commodities are priced in dollars, as the greenback goes lower, they usually go higher. And gold is an obvious play for a falling dollar.
Some of these programs and makeshift spending sprees were more successful than others, but any short-term rallies they caused in the stock market didn't last for long.
Oh, and there's more to come. We still haven't gotten to the billions of dollars in special loans proposed for GM and Ford, as well as the next new economic stimulus package which may be tied in with the bank bailout — a second economic stimulus that Treasury Secretary Paulson ruled out as recently as May.
If you think I'm being hard on Secretary Paulson, remember that he was in charge at Goldman Sachs when that company (among others) went crazy for bad debt that is now impossible to value properly. He's been in office a year and a half, and now — SUDDENLY! URGENTLY! — he needs us to approve his new bailout plan without time for deep discussion or changes ... to give his friends on Wall Street a check for $700 billion without a second thought.
I mean, just to focus on the cost of the current bailout plan: $700 billion in new U.S. debt is an additional $5,072 added to the debt burden of every U.S taxpayer. Plus it's ...
• Roughly what the U.S. has spent so far in direct costs on the entire Iraq war.
• As much as the combined annual budgets of the Departments of Defense, Education and Health and Human Services.
• Three and a half times what the S&L crisis cost taxpayers ($126 billion back then, $200 billion in today's dollars).
All this and it still might not fix the problem?! That means the U.S. government might have to spend even more money ... a lot more! Can you see why I think gold is looking so good?
And what if Paulson's plan doesn't work? He and other Wall Street types have been dropping hints that we averted disaster at the last minute. Maybe they're bluffing, but maybe they're not. What could happen to the U.S. dollar in a full-blown bank solvency crisis? Could it do a lot worse than it is now? Probably!
If this crisis gets worse ... if the Treasury opens up the floodgates on the money supply ... if the bailout plan fails ... all bets are off.
And that's when you want to own gold.
A Steep Correction Lays a Base
For The Next Leg Higher
We saw gold prices crushed in recent months. And this came despite bullish fundamentals. I'm talking about facts like ...
• Global gold mine production continues to go down ... and should decrease by 2% in 2007-2008.
• So far, in 2008, we have seen the least gold sales by the central banks since 1985. That means less gold supply coming on the market.
• The price of mining gold is going up ... from approximately $395 per ounce in 2007 to $458 in the second quarter of 2008, according to the World Gold Council. This puts a base under the price of gold, because if gold gets too cheap, mines close down and new projects aren't pursued.
One of the biggest drivers of gold now is gold ETFs. In fact, the world's biggest gold ETF, the SPDR Gold Trust (GLD), holds more gold than many countries.
I'm thinking that the smart money is betting on a big rise in gold. This pullback in gold has created a base for its next leg higher. Don't get left behind.
What You Can Do
This is one of those times when you might want to have some physical gold and silver on hand. I keep some just in case, and it lets me sleep at night.
If you don't have some in your portfolio, consider adding some now. Gold should be part of a well-balanced portfolio anyway. And the troubles for banks, brokers and the market in general probably aren't over ... not by a long shot.
When troubles come, make sure you have some precious metals handy and in your portfolio.
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"A Prudent man foresees the difficulties ahead and prepares for them; the simpleton goes on blindly and suffers the consequences."
Proverbs 22:3 -- Living Proverbs
LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. G&G Associates gets paid a commission from a membership purchase at www.publicgold.com/gngpreciousmetals.