Financial War Games and Gold
Kevin DeMeritt
President, Lear Financial
"From my perch, the economy appears to be strong and getting stronger," said President Bush in March.
From Europe's perch, the economy appears nowhere near as rosy.
While U.S. consumer confidence remains at its long-term average, which is to say, "things are pretty good", and our president keeps parroting his "economy is getting stronger" mantra, many European nations have taken a dramatically different view.
They have, in fact, just simulated the consequences of a financial meltdown.
Remember the glass-is-half-full-or-half-empty debate? Well, Europe, obviously in the "half-empty" camp, believes it sees something here we either can't see, are unwilling to see, or are eager to hush up.
In his April article, "Europe simulates financial meltdown", George Parker reported "Europe's financial regulators have held a 'war game' exercise, simulating a continent-wide financial crisis, amid fears they are ill-prepared to stop a problem spreading across borders."
The curious thing is, can you ever remember hearing of a continent, any continent, conducting this kind of financial panic exercise? Or, at least if it did, making it a matter of public knowledge? I can't, and, needless to say, it isn't very reassuring. Said one war games official, "It's like checking whether a nuclear power plant can survive a plane crashing into it."
Which, if you think about it, isn't all that reassuring either.
The Financial Bird-Flu Blues
The European simulation was hosted by no less than the European Central Bank and was monitored by the European Union finance ministers (who just happened to be holding a meeting in Vienna at about the same time).
Like a kind of financial bird flu, meltdown "contagion" is what they fear most. Parker referred to "Europe's vulnerability to a cross-border financial crisis."
The big question, of course, here is, what could kick off such a fiscal nightmare? The next big question is, are these demons on our doorstep? The answers given, the ones intended for public consumption anyway, involve three possibilities: a housing market crash, a bird flu pandemic, and dramatically higher oil prices.
They are all plausible flashpoints. Home prices have already started slipping on America's east coast, the bird flu is creeping inexorably westward, and oil is setting all-time highs. But what isn't getting publicly covered here, the thing that's as conspicuous as an elephant in the living room, is the sickly state of the dollar.
"How Does Anything Like This Ever Start?"
The US dollar is a "faith-based currency" dependent on the credibility of a central bank. That's according to Dallas Federal Reserve Bank President Richard Fisher, as reported by Reuters.
"In addition to a faith-based currency," Fisher said, "we are the currency of the world and we must maintain its integrity..."
The problem, as evidenced by the war games, is that the world may be losing faith.
Take Fan Gang, for instance. The director of the National Economic Research Institute in Beijing declared, "The U.S. dollar is no longer - in our opinion - a stable currency and is devaluing all the time."
Even more in-your-face about it, Masahiro Kawai of the Asian Development Bank said in late March, "East Asian economies need to prepare for a possible collapse of the US dollar."
You'd never catch an American official saying such a thing…well, unless it was a former Federal Reserve chairman. Paul Volcker is quoted as saying that there is a 75 percent chance of a dollar crash within the next five years.
Elaborating, he said, "…at some point, both central banks and private institutions will have their fill of dollars. I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change."
Yikes.
The danger is, when a "fiscal emergency" like this looms, any number of triggers can set it in motion. Remember the movie "It's a Wonderful Life"? Remember George asking Uncle Billy, "All right now, what happened? How did it start?" referring to the run on his savings & loan.
"How does anything like this ever start?" was Billy's insightful reply.
In his book, "Three Billion New Capitalists", analyst Clyde Prestowitz wrote, "A little bond market maneuver by Citibank caused a scary ripple in the European markets. There's no guarantee that something like that won't trigger a dramatic dollar crisis, and if it does, it won't just be another decline. It will be the end of the dollar's dominant role as the world's money."
Forget the elephant. This is more like a T-Rex in the living room. And it's the likely bottom-line reason for Europe's financial war games…and for gold shooting to the moon.
The Ultimate Weapon in the Financial War Game
The president of the world's largest gold producer, Pierre Lassonde, observed that worries over the U.S. and the economy play 'a much bigger role" in sending gold prices higher. The Newmont Mining president told MineWeb that the dollar is forecast to fall 30 percent on a Trade-Exchange basis because of the current account deficit.
Business Day reported much the same thing. "A HIGH probability of a sharp slowdown in US economic growth and a slide in the dollar are likely to continue driving investment in gold this year, says precious metals consultancy GFMS…"
Analyst Emanuel Balarie wrote: "Sadly, we have become an economy that is driven by consumers that are going further into debt everyday and a real estate market that has been pushed up by artificially low interest rates. Although this has fooled your average American to believing that the economy is strong, it has not fooled central banks around the world that are looking at diversifying out of the US dollar. The United Arab Emirates and other Middle Eastern countries have already switched or are looking at switching some of their US dollar reserves into Euros and Gold. Russia, Korea, and other countries have also reacted in the same manner."
Meanwhile one European source is quoted as predicting the Chinese will buy enough gold in 2006 that it could take gold to $850 an ounce.
If all this gives you the chills, kind of like that first time you watched a Hitchcock thriller, take a deep breath and relax. If most investors are unarmed in the financial war to come, you certainly don't have to be among them.
The ultimate financial weapon is and will always be gold. Fortunately, there's still time to back the truck up to the precious metal arsenal.
Kevin DeMeritt
www.goldcentral.com
April 25, 2006
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