September 2008

1) GOLD prices gave back yesterday's gain Tuesday on a stronger dollar and profit taking. Spot gold closed down $33.50 to $870.00/oz., silver fell $1.02 to $12.06/oz.

* "A lot of people who would never have thought about gold are seeing it as a safe asset right now,"said Commerzbank senior trader Michael Kempinski. Gold is also benefiting from positive supply and demand news. Germany's Bundesbank said on Monday it does not plan to sell any of its gold reserves, reports Reuters.

* "U.S. stock indexes made a respectable comeback Tuesday from the prior session's historic rout, in the context of cautious optimism that a rescue plan rejected Monday by the U.S. House of Representatives would be revived. "Maybe the sky isn't falling," said Frederic Ruffy, options strategist at WhatsTrading.com," reports MW.

* The euro fell the most against the dollar since the introduction of the shared currency in 1999 after France and Belgium led a state-backed rescue of Dexia SA, as the widening financial crisis forces governments to prop up financial institutions across Europe. The dollar rose against the yen on speculation the U.S. Senate will salvage a $700 billion bank bailout plan," reports Bloomberg.

* "Bankruptcy, not bailout, is the right answer: The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients. Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets," writes Jeffrey A. Miron, senior lecturer in economics at Harvard University, reports CNN.

* "When the government fails to pass a socialism bill and the market goes south, let it go south. I don't want to pass a socialism bill just to protect the stock market," said Rush Limbaugh. "I'm not particularly distressed that the bailout bill did not pass. I want to see this bill flesh itself out a little over a period of days," said talk show host Neal Boortz," reports Reuters.

* "Bailout marks Karl Marx's comeback: Friedrich Hayek wrote in 1932, 'Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. ... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about,'" reports NatPost.

* "The upside of downward mobility: Americans tend to reconnect with their roots during hard times; they also begin to think more inter-generationally. Instead of living beyond our means, Americans will soon discover true wealth is not measured by the abundance of our 'things', but rather, by the fewness of our wants and a willingness to sacrifice," writes Swiss America CEO Craig R. Smith.

BAILOUT: Proposed legislation details plan to enact historic bailout of nation's financial system. Emergency Economic Stabilization Act of 2008 -FULL TEXT ... Power Shifts From N.Y. to D.C. -WashPost ... A post-bailout world -MW... 'Un-American' Bailout, Paulson Should Have Quit, Gingrich Says -ABC... European financial giant Fortis partially nationalized ... Fed Pumps Further $630 Billion Into Financial System ... House to Wall Street: Drop dead -MW

* Stocks plunged Monday, with the Dow plunging 777 points for their worst point drop on record, as the House of Representatives voted down the government's $700 billion financial bailout package.

* "America’s serial bail-outs – nearing $1.6 trillion, or 12% of GDP – are playing havoc with the US budget. The deficit is above 6.7%, near a 60-year peak. But claims that the US is going bust are frivolous. The system will recover, but it may take a slow purge for a decade or more to rid us of the debt toxins," writes Ambrose Evans-Pritchard in Telegraph.

* "Confidence is more important than capital. There is plenty of capital waiting to jump back into these markets if Congress promises to insure any future problems. It must be insurance that will kick in only in the event of a real crisis – not a $700 billion check from the taxpayers," writes Swiss America CEO Craig R. Smith.

* "As predicted in these pages...we are witnessing an epochal shift -- from capitalism to socialism... from markets to politics... from subtle swindle to naked larceny... from white collar grifters to stick-up men... from slick fraud to brute force. And then... who will rescue us from the rescuers?" writes Bill Bonner at DailyReckoning.

* "The downsizing of America is at hand. It is hard to see how America avoids future deficits that reach $1 trillion a year. These will imperil both the dollar itself and the ability of the United States, which saves nothing, to borrow from the rest of the world," writes Pat Buchannan at WND.

* My Bailout Plan: "Let's not put more money into the hands of those who created the problem. Let's put the money into the hands of the people who were victimized. Why should the victims pay twice and the victimizers get off scot-free? Here's my plan," writes WND founder Joseph Farah.

* "This is not a bailout of anyone, not Wall Street, not Main Street, and certainly not the so-called "fat cats." It's an infusion of liquidity, designed to unclog the financial markets. In doing so, it will benefit everyone, business and consumers alike," writes Irwin Kellner at MW.

* "The rush by retail investors into gold last week forced the US government to 'temporarily' suspend the sales of the popular American Buffalo one-ounce bullion coinafter depleting its inventories. The shortage of gold coins is the latest sign of investors seeking a safe haven into bullion amid Wall Street woes," reports FT

* "At least 165 economists have signed a letter to Congress members warning of three pitfalls in the Bush administration's $700 billion proposal to deal with the Wall Street crisis. The economists say they are well aware of the current financial situation and agree there's a need for bold action but ask Congress 'not to rush,'" reports WND.

* "Washington Mutual, the nation's largest savings and loan with $300 billion in assets, was seized by federal regulators on Thursday night in the largest bank failure in American history."

"Regulators simultaneously brokered an emergency sale of virtually all of WaMu to JPMorgan Chase. The remainder of WaMu will be operated by the government. Shareholders and some bondholders will be wiped out," reports NYT.

* Meanwhile, the number of workers filing new claims for jobless benefits jumped 32,000 last week, showing growing pressure on the U.S. economy. New orders for long-lasting manufactured goods dropped by a sharper-than-expected 4.5% as new home sales fell 11% in August, according to reports released Thursday.

* Warren Buffett's decision to invest $5 billion into Goldman Sachs stock helped to boost sagging confidence on Wall Street last week following two days of triple-digit losses, a sharply lower U.S. dollar and rising commodity prices.

* "What I envisage as this credit crisis goes turns into a full-fledged global economic slump is that half the world resorts to currency devaluation in a scramble to stave off recession and cling to market share. This will be very good for gold," reports Ambrose Evans Pritchard at London Telegraph.

*"Gold prices are rising as the era of loose credit draws to a close and the ensuing global crisis leaves few solid instruments for cautious investors to hold onto," said investment bank Fairfax," reports Reuters.

* "Bullion prices will go higher, driven by large-scale buying by major holders of dollars who fear the effects of the U.S. government's bailout plan on the currency. Central banks or sovereign wealth funds are among those likely to buy gold to diversify their investments and hedge against the risk of a weaker dollar," said Barrick Gold Corp. Chairman Peter Munk, reports Bloomberg.

* "I think gold will go back to $1,000 just because the U.S. is going to have to print so much money to foot the bill for everything they want to do. They've created close to $5 trillion new debt in the last eight years. It looks like they're going to have to add another trillion in debt here real quick," said Peter Major of Cadiz Financial Services," reports Goldseek.

* "The biggest financial bailout in American history hit a speed bump Tuesday on Capitol Hill, sending stocks sharply lower in volatile trade, as members of the Senate began to balk at quick action to pass the measure. A massive proposal requires more careful discussion and consideration," reports MW.

* "Despite the warning, influential lawmakers in both parties demanded changes in the White House-backed proposal, and conservative Republicans recoiled at the prospect of federal intervention into private capital markets. Six weeks before the elections, both major party presidential contenders also insisted on alterations in the administration's prescription for the worst financial crisis in decades," reports AP.

* "Fed Chairman Ben Bernanke bluntly warned reluctant lawmakers Tuesday they risk a recession with higher unemployment and increased home foreclosures if they fail to pass the Bush administration's $700 billion plan to bail out the financial industry. Paulson says financial crisis is embarrassing for the United States," reports AP.

* "Once upon a time — just six months ago, in fact — financial services firms sank or swam on their own and the Federal Reserve had a clear mission and a nearly pristine balance sheet of safe Treasury securities. No more. Treasuries accounted for 91% of the central bank’s reserves a year ago: now 48% of its coffers are filled with riskier investments," reports FinWeek.

* "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. It's simple supply and demand. Since commodities are priced in dollars, as the greenback goes lower, they usually go higher," reports M&M.

"This market’s a triple sell. Raise cash, buy gold. If you’re already on the sidelines, stay there. Even if Paulson’s plan goes through, there’s still earnings risk to worry about," said Mad Money host Jim Cramer on CNBC.

* "Central banks may be starting to turn to one of the few assets in which they can invest: gold. Turbulence in the financial markets and recent U.S. dollar weakness are helping the precious metal claw back its reputation as the central monetary anchor within the international monetary framework, industry participants say," reports WSJ.

* "Gold is the ultimate currency and safe haven during market volatility and uncertainty. Investors need not panic if they own a portion of their assets in gold," Swiss America CEO Craig R. Smith told FOX 10 on Monday.

* "The Democratic and Republican candidates think of it as a Wall Street problem and that 'Main Street' shouldn’t be asked to 'bail out' these fat-cat financiers. This is a flawed way of looking at a financial hurricane that will defy Washington’s usual approach of exploiting the 'haves vs. have-nots' issue. This is a killer storm that will flatten everything in its path. In 2002 Warren Buffett called derivatives 'financial weapons of mass destruction'. In the next six years, these financial WMDs grew by 500 percent to more than $500 trillion. The sheer size of these derivatives has greatly increased the risks of catastrophe. Hearing the solutions offered by McCain and Biden today reduces my confidence that either the Democrats or the Republicans have the knowledge or the imagination to take on the biggest economic crisis in America since the 1930s," writes Frank Holmes, CEO of U.S. Global Investors.

* "The Treasury plan would push Washington's potential bailout tab to $1.8 trillion, to absorb bad mortgages and other assets from bank or other institution balance sheets to keep the financial system from collapsing," reports CNBC.

* "The market is demanding accountability and transparency, not additional regulation. If our leaders are serious about change they should immediately reduce government spending by 15% within four years. It is the only action that will produce meaningful results," reports WND.

* "As financial workers suffer through tumultuous times on Wall Street, some are turning to religion. Attendance was up at lunchtime meetings in New York's financial district. 'We cannot put our faith in riches, that we cannot put our faith in money,' Bozzuti-Jones said in his sermon at lunchtime on Friday, which he devoted to coping with the financial crisis," reports Reuters.

* Gold prices gained 12%, over $100/oz. last week after hitting a 2008 bottom on 9-11. Wednesday gold rocketed 11%, the largest one-day gain in history, on a safe haven rush amid extreme financial market volatility.

* "President Bush approved making available as necessary from the Exchange Stabilization Fund for up to $50 billion to buy more illiquid mortgage assets. The ESF was created after the Great Depression and uses the U.S. gold reserve as collateral for financial stability," reports MoneyM.

* "The most important asset in all of the recent bailouts is tangible wealth, real estate, not paper. Our government just backed the mortgage debt with its gold reserves. This could be a precursor to government confiscation of all bullion if things get worse," writes Swiss America Sr. broker Jim Carrillo.

* "Frankly, we're surprised that gold is not already at $2,000 an ounce," declared Citigroup analysts John H. Hill and Graham Wark. Citigroup asserts that gold will benefit from both the "gloom & doom" and "muddle-through & monetization" scenarios, possibly regaining $1,000 per ounce at year-end and even doubling or tripling in the long term," reports Mineweb.

* "This unprecedented step by the government is the dawn of a new and unfortunate era. While it will flush a few abusive folks out of the system, it will forever alter the integrity of the free market system. There will be many consequences. As Phil Erlanger said on this morning’s Buzz, it is martial law for the markets," reports Minyanville.

* "Today's reported potential infinite bailout of all and any portends, if adopted, is the largest increase in dollars outstanding since the Jurassic Age. It closely models actions undertaken regarding the production of currency liquidity seen in the "Weimar Republic," JSM.

* "Can you still make money in gold? "Absolutely, there is a lot of momentum there. Financial uncertainty will continue through the end of the year. There's been a shift of funds from stocks into precious metals," said Evaristo Stanziale, senior VP at SCS Commodities, reports CNBC.

* "Gold can hit $1,500/oz in the next 2 to 3 years. The current gold prices are amazingly cheap, presenting an outstanding opportunity for long-term investors, opines Aaron Smith at Superfund Financial, reports CNBC.

* "The government’s actions have amounted to attempts to tackle crises at financial institutions as one-off incidents, rather than tackling the broader systemic challenge," said Richard Bernstein, chief investment strategist at Merrill Lynch reports FT.

* "Hank Paulson's effort to prop up Fannie Mae and Freddie Mac has various beneficiaries but few gain more than foreign investors. US institutions may well suffer more than foreign ones. In brief, it is good for overseas central banks and sovereign wealth funds but bad for US regional banks," reports FT.

* "America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich… it's just bailing out financial institutions," investor Jim Rogers, CEO of Rogers Holdings, told CNBC.

* Over the years, Fannie Mae and Freddie Mac showered riches on many winners: their executives, Wall Street bankers and Washington lobbyists. Now the foundering mortgage giants are leaving some losers in their wake, notably their shareholders, rank-and-file employees and, in the worst case, American taxpayers," reports NYT.

* "Because Pimco is a huge investor in mortgage-backed bonds of Fannie and Freddie, the firm and its mutual funds stand to benefit now that the government is stepping in to assure that the companies stay solvent. Pimco also will be helped as the Treasury begins to buy mortgage-backed bonds in the open market," reports LATimes.

* "Any US dollar injection big enough to avert a depression triggers runaway inflation. If not big enough: depression. US on knife-edge. Pimco bond king Bill Gross went crazy last week, urging government to bail out everyone, to save the system. Either he is a closet socialist, a corporate fascist ... or just trying to get government to bail him out of 61% of his toxic waste mortgage backed securities. If Bush bails them all out, the die would be cast for inflation unseen in the West since 1923 Germany. If no bail: Hello, 1929. Gold helps you either way," reports The International Harry Schultz Letter to MW.

* "While this bailout created a knee jerk stock market surge, but longer term this action will ultimately hurt the housing market as higher taxes push more U.S. homeowners over the edge into foreclosure. Gold is the only asset that never needs a government bailout," said Swiss America CEO Craig R. Smith.

* "Seizing Fannie and Freddie from their stockholders as a way of propping up home prices by making mortgages cheaper and more readily available than they would be on a free-market basis is being touted as a good deal for taxpayers and for homeowners. But it is a bad deal for America, because the precedent that a company may be seized by the government without a shareholder vote on a regulator's whim is one that will make property rights less secure in this country for generations to come," reports NYSun.

* "One fear is that the multibillion-dollar cost of the rescue will increase government debt, which could push up yields on Treasury bonds and, in turn, force market interest rates higher. Higher rates make it harder for businesses and consumers to borrow, hurting both economic growth and stock values. Treasury yields also affect mortgage rates, meaning that higher yields could erase some of the advantages of the bailout for home buyers," reports WSJ.

* "The U.S. government seized control of American International Group Inc. in an $85 billion deal that signaled the intensity of its concerns about the danger a collapse could pose to the financial system. The step marks a dramatic turnabout to prevent the insurer from falling into bankruptcy," reports WSJ.

* "The Federal Open Market Committee decided Tuesday to keep its target for the federal funds rate at 2%. The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee," Full statement.

* "U.S. Treasury three-month bill rates dropped to the lowest since at least 1954 on concern that credit market losses will widen after the bankruptcy of Lehman Brothers Holdings Inc. and the federal takeover of AIG. Investors pushed the rate as low as 0.233% as the loss of confidence in credit markets deepened," reports Bloomberg.

* "The cost of borrowing in dollars overnight more than doubled to the highest since 2001 as the collapse of Lehman Brothers and credit downgrades of American International Group Inc. led banks to hoard cash. The overnight dollar rate soared 3.33% points to 6.44% today, its biggest jump in over seven years," reports Bloomberg.

* "How many commercial banks, investment banks and mortgage guarantors can the government take over before we as a country are forced to create money to meet all the obligations represented by these takeovers? We will have to borrow or print it," reports WND.

* The Federal Reserve so far has injected 120 billion fresh dollars -- $50 billion Monday night following Sunday's $70 billion into overnight "repos", the most money since Sept. 11, 2001, in the wake of Lehman bankruptcy, Merrill's demise and AIG's need for cash. "In a stunning reshaping of America's financial landscape, two Wall Street firms fell from the shock waves of a credit crisis that has plunged the financial system into turmoil, as stocks tumbled across the globe Monday," reports AP.

* "Gold and silver have a historic role as hedges against financial crisis and monetary inflation, they lose that role only temporarily in a market selloff and they certainly should resume that role once the peak selloff is past. It's not a time to panic, it's a time to reflect," said Bradford Cooke, chairman and CEO of Vancouver-based Endeavour Silver Corp. to Canoe.

* "The root cause lies in the actions of governments across the Western world. They held interest rates too low for much of the past two decades, and encouraged the debt burden to explode to unprecedented levels. This reckless experiment has left our societies acutely vulnerable to a sudden reversal of debt issuance, or 'deleveraging' as it is known. The ferocious purge now under way will come at a high human cost," reports Telegraph.

* "Reserve Primary Fund, a money-market mutual fund with $64.8 billion in assets, fell below $1 a share in net asset value because of losses on debt issued by Lehman Brothers. 'It exacerbates some of the flight-to-quality into Treasuries,' said Carl Lantz, an interest-rate strategist at Credit Suisse Securities USA," reports Bloomberg.

* "The greatest risks to small investors and savers right now are a decline in the value of their retirement account accumulations and a decline in the yields on interest bearing accounts at the same time inflation is increasing," says Stephen Brobeck, executive director of the nonprofit Consumer Federation of America, reports CNBC. (How To Save Your IRA Today!)

* "Wall Street is facing a valuation crisis as the Fed measures out punishment for the credit excesses of the last decade. Hedge funds are running away from oil and into Treasuries. Gold is rallying because it is the only asset on earth with absolutely no third party risk," said Swiss America CEO Craig R. Smith.

* "Gold's safe haven credentials are set to come into their own again as the global financial and capitalist system itself is creaking at the seams," said Mark O'Byrne, executive director at Gold and Silver Investments," reports MW.

* "The United States is mired in a "once-in-a century" financial crisis which is now more than likely to spark a recession, former Federal Reserve chief Alan Greenspan said Sunday. This coming from the man who created today's housing, mortgage and credit crisis. Read more about THE BUTCH CASSIDY OF BANKING.

* "Analysts say the price of the precious metal may have finally bottomed. 'Gold prices might already be trading at oversold levels," wrote Tobias Merath, head of commodity research at Credit Suisse, in a note Thursday. "Fundamentals still speak in favor of a recovery to $900 or slightly higher in the next few months,'" reports MW.

Year-over-year perspective: One year ago gold traded at $708/oz. and the Dow traded at 13,000. Today gold is trading up over 8% at $775/oz. while the Dow is trading down 15% near 11,000. So, although gold suffered over a 26% drop from the $1,002 high, the shiny yellow metal is still running circles around stock indexes year-over-year. Gold's average increase from August to the end of the year between 2003-2007 is 14.6%. [NOTE: U.S. $20 Liberty gold coins: less volatility, four-times the growth last year!]

* "Gold may rise to $950 an ounce by the end of year as central banks and miners hold back sales and investors buy the metal as a haven against falling stock prices," London-based researcher GFMS Ltd. said to Bloomberg.

* "The commodity bull market still has legs, despite the recent downturn in prices. If history is any guide, this bull market can last until 2020. A stocks-and-bonds bull run is over. Today, Wall Street traders are driving Maseratis. Tomorrow, cotton farmers will be driving them," said renowned investor Jim Rogers.

* "If smart investors are selling stocks, what do they do with the money? Our advice has been to buy gold. Smart money seems to think that it is better off in US Treasuries than in gold. Yesterday, while gold and stocks both dropped, treasury bonds went up. This makes us think the smart money is not as smart as it thinks. The US will be recognized for what it is – a subprime borrower. And eventually, US treasury bonds will be looked upon as though they were Fannie Mae shares," reports Bill Bonner at DailyReckoning.

* "Gold may gain 10% by the end of the year driven by demand for jewelry during the Indian wedding and festival season, according to JPMorgan Chase & Co. Bullion may also be boosted by declining global output from mines and increasing costs of production," reports Bloomberg.

* "Now, we are clearly in Stage III [of the gold bull market], a period of price volatility evidenced by its ascent to $1,003 in March and recent correction below $800. This period of volatility will not change until Stage IV begins. Stage III is the last remaining chance for investors to liquidate soon to be illiquid positions and reinvest in gold and silver which will be among the few safe havens," reports DrSchoon.

* "The three conditions we were waiting for to recommend buying gold have been satisfied, and investors should look for an initial target of $850/oz. - our one-month forecast - with an extension towards our $900/oz. three-month forecast and potentially beyond," reports John Reade at UBS.

* "Stage two of the gold bull market is just beginning. Gold looks like a bargain in the new world currency disorder. What we are about to see is a race to the bottom by the world's major currencies as each tries to devalue against others to shore up exports," reports Telegraph.