Climbs As Economic Catastrophe Deepens By John Browne, Senior Market Strategist,
Euro Pacific Capital
February 19, 2009
when Congress passed its $787 billion stimulus package, the
size of the plan caused many observers to forget the water
that has already passed under the bridge. Fewer still are
wondering what havoc will erupt when all this liquidity eventually
The latest spending, signed into law yesterday by President
Obama, came on top of $300 billion committed to Citigroup,
$700 billion for TARP 1, $300 billion for the FHA, $200 billion
for TAF and some $300 billion for Fannie and Freddy. Just
over the last six months, which excludes the initial Bush
stimulus and several massive, unfunded Federal guarantees,
nearly $5 trillion has been committed by the government to
the financial industry. Rational observers cannot be faulted
for concluding, despite Administration claims to the contrary,
that the government is merely throwing money at the problem.
Although the rhetoric has managed to convince many observers
of the possibility of success, the gold market appears to
clearly understand the implications of this unprecedented
The feeling that the government has no idea how to proceed
has created palpable panic. In response, pragmatic investors
are seeking the ultimate store of wealth. In 2009, as has
occurred countless times throughout history, that store will
be stocked with gold. Thus, whether the Federal government's
interventions will succeed or fail will be anticipated by
the price of gold. Right now, the market is screaming failure.
Prior to the latest round of Federal spending, the Federal
government had committed $4 trillion to postpone bank collapses
and to lay the groundwork for subsequent restructuring. But
has any of this activity actually rescued the banking system?
In light of the evidence of deepening recession, is it likely
that the additional $787 billion in the latest stimulus will
instill enough confidence to restore economic growth? If not,
what damage will it do to the eventual recovery?
Congressional rescue packages rarely work. Nevertheless,
Congress is turning up the heat with previously unimaginable
increases of government debt to fund stimulus and rescue packages.
Senator McCain rightly describes the scheme as "generational
theft". Each package of debt will encumber many future
generations, halt restructuring and also threaten latent hyperinflation.
While Congress claims that the seriously over-leveraged economy
is in desperate need of restructuring, it appears blind to
the fact that deleveraging will encourage such restructuring.
Instead, Congressional leaders actively seek to increase leverage
and add debt. They warn of fire, while pouring petrol on the
The seriousness of the situation is magnified by the rapidly
increasing scale of the problem. Just today, the release of
the latest minutes of the Federal Reserve confirmed that even
that bastion of eternal optimism is sobering. The American
economy, which shrank by 3.8 percent in the last quarter of
2008, is forecast to decline by some 5.5 percent in the first
quarter of this year. In some pockets, the unemployment rate
is already in double figures. Despite massive Government spending
on rescue and stimulus, the American consumer clearly is becoming
increasingly nervous, and the credit markets show few signs
With bad news only getting worse, investment markets are
turning into quagmires. The Dow Jones Average is testing new
lows, and the commodities markets show few signs of life.
In such times, the price of gold should fall along with the
prices of other assets and commodities. But, the reverse has
occurred. In the past two months, gold has staged a remarkable
rally. This is despite the activity of price-depressants such
as official gold sales by the IMF and official 'approval'
for massive naked short positions to be opened by new 'bullion'
Not only have gold spot prices risen in the face of such
selling pressure, but the price of physical gold is now some
$20 to $40 per ounce above spot. This would indicate that
investors are now so nervous that they are insisting on taking
Make no mistake, the economy will not turn around soon. When
the recovery fails to materialize, look for governments around
the world, and especially in the U.S., to send another massive
wave of liquidity downriver. When it does, the value of nearly
everything, except for gold , will diminish. Don't be intimidated
by the recent spike in gold. Buy now while you still can.
Browne is the Senior Market Strategist for Euro Pacific Capital,
Inc. Mr. Brown is a distinguished former member of Britain's
Parliament who served on the Treasury Select Committee, as
Chairman of the Conservative Small Business Committee, and
as a close associate of then-Prime Minister Margaret Thatcher.
Among his many notable assignments, John served as a principal
advisor to Mrs. Thatcher's government on issues related to
the Soviet Union, and was the first to convince Thatcher of
the growing stature of then Agriculture Minister Mikhail Gorbachev.
As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do
business with." A graduate of the Royal Military Academy
Sandhurst, Britain's version of West Point and retired British
army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.
In addition to careers in British politics and the military,
John has a significant background, spanning some 37 years,
in finance and business. After graduating from the Harvard
Business School, John joined the New York firm of Morgan Stanley
& Co as an investment banker. He has also worked with
such firms as Barclays Bank and Citigroup. During his career
he has served on the boards of numerous banks and international
corporations, with a special interest in venture capital.
He is a frequent guest on CNBC's Kudlow & Co. and the
former editor of NewsMax Media's Financial Intelligence Report
and Moneynews.com. He holds FINRA series 7 & 63 licenses.