Who will be the first to stampede to goldThursday, July 26th, 2007
A Golden Prophecy
By James West
In the movie "The Day After Tomorrow," panic-stricken animals are seen stampeding away from the coast of America at top speed, cannily forewarning of the impeding atmospheric mayhem about to descend on mankind.
Animals have always been credited with the ability to foretell certain types of disasters, ranging from heart attack to earthquake.
That ominous behavior is manifested in certain groups among human beings, too. When the clouds of financial bedlam start to gather, for instance, investors buy up gold and sell corporate equities.
Central bankers, as the foils of the global gold cartel, increase gold sales whenever the fundamentals of gold threaten to push it into record territory.
When America's top investment banks start to get mentioned frequently in the same paragraph as the word "trouble," everybody stops and pricks up their ears.
Bear Stearns? Goldman Sachs? In trouble?
Well, not exactly.
But when private equity buyouts, whose debt is packaged and sold through such illustrious houses as high-yield debt instruments, start to fall apart because investors are hesitant to own that sort of debt, it's time to check the foundations at the base of the dam for cracks.
Consider this excerpt from a Bloomberg.com news story of July 26:
"The risk of owning bonds of Wall Street firms surged as concerns escalated that investment banks will be hurt by rising losses from subprime mortgages and a freeze in demand for corporate debt.
"Credit-default swaps on $10 million of Goldman Sachs Group Inc. bonds jumped as much as $18,000 to a record $85,000, according to broker Phoenix Partners Group in New York. Bear Stearns Cos. credit swaps surged as much as $29,000 to $110,000, also a new high. Lehman Brothers Holdings Inc. climbed as much as $24,000 to $104,000.
" 'You have a stampede of the animals away from the watering hole,' said Scott MacDonald, director of research at Aladdin Capital Management in Stamford, Connecticut, which manages about $20 billion in assets. 'Right now, everything that smacks of financial risk is backing out through the door.'
"Risk premiums surged as Absolute Capital Group Ltd., an Australian hedge fund, suspended withdrawals from two funds after forecasting losses on U.S. subprime mortgages. The firms' credit swaps extended increases from yesterday when banks including Goldman were stuck with $20 billion in loans they couldn't sell to finance buyouts of Auburn Hills, Michigan-based automaker Chrysler and Europe's Alliance Boots Plc.
"Default swaps on Deutsche Bank AG, Germany's biggest bank, rose 9,000 euros to 35,000 euros, according to Royal Bank of Scotland, from about 15,000 euros at the beginning of the month.
"Deutsche Bank was one of eight banks stuck with 5 billion pounds ($10 billion) of loans for Kohlberg Kravis Roberts & Co.'s purchase of pharmacy chain Alliance Boots.
"Credit swaps on JPMorgan Chase & Co., which is helping finance both the Chrysler and Boots deals, rose as much as $25,000 to $75,000, Phoenix prices show.
"Credit-default swaps based on 10 million euros of the debt of WestLB, Germany's third-biggest state lender, surged 23,000 euros to 58,000 euros, according to data compiled by CMA Datavision in London.
"The rising risk perceptions of brokers propelled indexes in Europe and the U.S. An index that tracks corporate credit risk among U.S. investment-grade companies surged to the highest since June 2005 and a European index had its biggest one-day jump since it started trading in June 2003."
Another buyout deal threatened by credit market deterioration:
"LONDON (Reuters)--Shares of music company EMI Group (LSE: EMI.L) closed down 5.2 percent on Wednesday as concerns grew that its private equity buyer Terra Firma was having trouble securing financing for the deal.
"Terra Firma and adviser Citigroup (NYSE: C) were haggling over the terms of the debt ahead of a Sunday deadline, people familiar with the situation said, because of deteriorating conditions in credit markets since the deal was announced in May.
"Citigroup and Terra Firma declined comment. No one at EMI could immediately be reached for comment."
This is a strong signal.
Demand for U.S.-backed debt instruments is falling quickly and sharply.
Meanwhile, on the other side of the world, former Malaysian prime minister Dr Mahathir Mohamad has called on the Islamic world to embrace the use of the gold dinar for international trade and as an alternative to US dollar reserves in central banks.
Delivering the keynote address at the International Conference on Gold Dinar Economy 2007 yesterday, he said such coins could be used as a means of wealth creation without running the risk of losing their value and purchasing power as in the case of paper currency.
"Such coins are not legal tender but may be exchanged with currency at gold value at a given time.
"This is quite simple. It is nothing more than keeping gold bullions as savings. They can be traded and they retain their value in terms of purchasing power quite well," he told delegates at the conference held at the Putra World Trade Centre.
Stating that the US currency is "worth nothing" and should not be accepted as a payment instrument, the former prime minister said that countries with US dollar foreign reserves and bonds were deluding themselves, as the downfall of the greenback was inevitable.
He said countries that continued to propagate the use of US dollars in international trade were keeping themselves hostage to Western monetary policies, and should instead explore using the gold dinar for international trade.
"With the usage of the gold dinar, some of the power of the Western banking system and the US dollar would be diminished. With this, the clout of these powerful countries would also diminish. On the other hand by refusing to use the gold dinar, Muslims could be impoverishing and weakening themselves," he noted.
If the Islamic world were to replace the U.S. dollar with the gold dinar as its reserve currency of choice, this would precipitate the equivalent of a "run on the bank" in U.S. dollars, and its value would essentially collapse.
While the price of Iranian oil is still quoted in US dollars, Hojjatollah Ghanimifard, chief of the National Iranian Oil Company (NIOC), says roughly 70% of Iran's oil income is now paid in currencies besides the U.S. dollar. "Almost all of our European clients and some of our Asian customers have agreed to make payments in currencies other than dollars," he said.
Bob Chapman writes in the respected International Forecaster:
"As the dollar weakens foreigners are scooping up American assets. The Chinese and others are diversifying their reserves away from the dollar. Foreigners are not buying US assets because of a robust economy; they are buying to dump dollars, which are shrinking in value daily.
"This is going to go on for years unless the US declares bankruptcy. In 2006 foreigners bought $147.8 billion of US businesses, up 77% from 2005. The Europeans dumped $109.9 billion, twice what they got rid of in 2005. Germany was the largest buyer at $22.7 billion. Middle Easterners spent $12.4 billion and the Japanese $8.7 billion. Have no fear the Chinese are on the way. Selling will turn into a tidal wave over the next few years as the dollar drops 35% to 50%."
What am I driving at here?
Simply this.
The factors predicted in previous articles building a case for the inevitable explosion in the price of gold are now seen to be reality, which portends a near-term break in the price of gold for new record territory.
The effect on the mainstream stock market will be substantial and prolonged, and if you don't get yourself into gold at some level, you will be part of the carnage.