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« Global Stock Markets Fall As Gold Prices Rise | Main | Convertible Loan Notes: The way to go? »
Friday
Aug102007

Central Banks Print Another $167 bln: This Will Not Solve The Problem

In an attempt to prevent a financial crisis, the European Central Bank pumped an emergency €94.8bn ($131bn) into the banking system. This cash injection is larger than that the one that happened the day after 9/11 (€69bn) which shows what a big problem the ECB is facing.


This “cash injection” is really just the ECB printing loads of worthless fiat currency and throwing it at the problem, but this will not prevent the coming financial crisis that will hit the credit systems, including mortgages and home loans, particularly hard. Along with printing this vast amount of money, the ECB also made a one day pledge to fulfil any and all funding requests from financial institutions.

The European Central Bank was not alone though as The Bank Of Japan injected 1,000bn yen ($8.45bn), The Reserve Bank of Australia injected A$4.95bn ($4.17bln) and the Federal Reserve in American pumped $24bln into US markets. North of the border, The Bank of Canada issued a statement saying it would, “provide liquidity to support the stability of the Canadian financial system and the continued functioning of financial markets”. The Bank of Korea also said that it was ready to inject money into the market as well.

We saw the overnight Euro rate soaring up yesterday, up to nearly 4.4%, from its previous levels between 4.0% and 4.1%. These moves by the ECB were probably aimed at lowering this rate, and the ECB succeeded in this aim. By flooding the market with $131bln, the rate went down to around 4.0% by the end of the day. This is simply supply and demand economics. If you want to drop the price of an entity, then release a load of that product onto the market and the price will drop. That is exactly what the ECB did, lowered the price of money by putting $131bln up for grabs.

This brings the total cash injection to US$167.62. This is an tremendous amount of money. This is more than the worth of the entire Coca Cola Company and more than PepsiCo. For this amount of money, one could buy mining giant Rio Tinto and still have enough change to seize control of Anglo American. Alternatively, one could buy Google or for diversity purchase all of Apple Inc and Dell Inc on top of that. This money is more than Bill Gates and Warren Buffet have made combined in a lifetime, and the central banks have just blown it trying to support a doomed market.

Central banks around the world are trying to reassure financial institutions that everything is fine in the market, but there are still many people that are very concerned about the situation that the US housing market is in. Mortgage stocks are plummeting and the real estate crash we have been predicting for a long time looks like it is being to stir.

Although printing money seems to have pushed the problem away temporarily, it is not a solution. It only pushes the problem back, delaying the invertible “doomsday”, and probably making it worse. The housing and credit bubble are extremely over inflated and they have to crash for that is the nature of economics. One would have thought with such fear in the market, gold would be soaring, but yesterday we saw gold fall over $12.00. We still think that gold and silver will be the primary choice for investors looking for a “safe haven” over the coming years. As to why gold fell in yesterday's trading, there are a few possible reasons.

Firstly, the US Dollar Index gained 0.58% or 0.46 yesterday and as gold usually moves in the opposite direction to the dollar, this explains some of the drop. Secondly, it could be the PPT and the Fed dumping on the gold market again in an attempt to slow the $30 gains gold prices have made in recent weeks. Thirdly, a reason why gold did not rise could be that investors and traders are not simply aware of gold or they did not think of putting money into the yellow metal in the middle of the meltdown. Any traders that did think of gold would see gold down at least $10 (very convenient timing, well played Mr Bernanke) and instinctively would not want to buy something that was going down.

However, investors were looking for a safe heaven. Yesterday we watched the yields on 30-day commercial paper rise 5 basis points to 5.32 per cent, equalling its highest rate since 2001. The key point here is that the investors wanted a temporary safe heaven for their capital. They were not looking for a long term haven as the yield on the two-year treasury bonds fell 22 basis points to 4.44 per cent. Investors choose the 30 day bonds as they are not sure where to put their capital in order to protect it from the current turmoil in the market and needed to secure it for the time being while they decide what to do with their capital in the longer term.

This is where gold and gold stocks come into the picture. We believe that gold and silver are going to be the first choice for investors looking for protection from the coming crash and also investors looking to profit from it. We see a major rally in gold and gold stocks beginning at the end of the summer. You can keep updated on the gold market and which gold stocks to invest in by subscribing to our free Gold Prices Newsletter. The precious metals will do very well and so we think silver is also good investment and you can keep informed on the silver market and silver stock by subcribing to The Silver Prices Newsletter free of charge.

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