The 2011 Great Global Bailout

The big news today is a massive bailout of the banks of Europe by the US Federal Reserve and the world's reserve currency.

Faithful readers know that we are fond of saying the financial debt crisis of 2008 is very much alive and it is clear for everyone to see that it had only been treated with a paper band-aid known as Quantitative Easing 1 and QE2.

Those economic green shoots touted in 2009? Nothing more than weeds.

The breadth and depth of the financial earthquake the world suffered in 2008 was so great that the repercussion's are only just beginning to be understood.  And the recession it triggered has not ended... it has only just begun.

One of the news stories that flowed well under the mainstream media radar screen back in July was the results of an audit of the US Federal Reserve.

The first ever Government Accountability Office (GAO) audit of the US Federal Reserve Bank in the Fed's 100 year history indicate that the bank dished out $16 trillion in emergency aid to U.S. and foreign banks, corporations and governments in what the Fed calls all-inclusive loans during the financial crisis.

$16 Trillion!

In all the Fed disclosed more than 21,000 transactions which it utilized after Lehman failed to push as much liquidity into the worldwide financial system as possible to stabilize things.

Fast forward to today.

The debt escalating debt contagion stories coming out of Europe the past two weeks have been breath-taking.

It has forced the US Federal Reserve to step in again and bail out Europe's banks with unlimited access to US Dollars.

Here is the European Central Bank announcement:

• The Governing Council of the European Central Bank (ECB) has decided, in coordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three US dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year. These operations will be conducted in addition to the ongoing weekly seven-day operations announced on 10 May 2010.

As noted over on The Fundamental View, the global printing presses are now running full tilt in the most historic liquidity event ever.

In essence the Governing Council of the European Central Bank (ECB) has decided, in what is being deemed as a coordinated effort with the US Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank to conduct three US dollar liquidity-providing operations.

Short term this saves the Euro from the collapse it was facing just last week.

But as this story on Yahoo headlines "Dollar access no long-term fix for Europe's crisis but could buy time for banks"

Officially this confirms the view that the banks around the world are pretty much insolvent given their exposure to the mounds of toxic sovereign debt.

Basically governments and banks are broke because they lent money out to other banks and governments.

The ECB said it would hold three separate operations between October and December to help see banks through the year-end period. Basically the Americans, the British and the citizens of any non-Euro nation in the West are now watching their central bank printing dollars at the expense of their children's’ future’s so that it can bail out banks from other parts of the world.

This is what we get in a world of global economic collaboration when every bank is somehow tied to each other through invisible lifelines. Point being, if one major institution goes down, others will fall like dominoes given that they have all lent money to one another via exotic instruments in order to keep the global banking ponzi scheme alive.

The bottom line is that the US Federal Reserve - as it did in 2008 with $16 Trillion, just backstopped a massive loan to European banks to keep them solvent.  

As the Fundamental View asks, "How closely tied are American financial institutions to the European banks needing the bailout for the Fed to take such measures overseas?"

The world's problems are literally being papered over. But the reality is that the situation is much graver than most people realize.

And what just occurred was a very short term, temporary solution.

The breadth and depth of the financial earthquake the world suffered in 2008 is only just beginning to be understood.

And the recession it triggered has not ended... it has only just begun.

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Email: village_whisperer@live.ca
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On Gold and Silver's dramatic drop this morning

Both Gold and Silver plunged dramatically this morning.

As recently as last month we posted that "Gold is still cheap because you can bet it hasn't even begun it's ascent. Nor has Silver. But make no mistake... it will continue to be a wild roller coaster ride involving wild swings."

And the reason for those wild swings?

Over the past year this blog has tried to lay out for you just how the metals markets are heavy influenced by manipulation... particulary manipulation by central banks and their proxies.

Last week we profiled one of the US Embassy cables from China released by Wikileaks that show this manipulation is recognized worldwide, even in China.

The US Embassy cable reported that, according to China's National Foreign Exchanges Administration, "The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or Euro."

The biggest fear in China right now is the fallout from the fierce competition that is emerging in the West as the big countries battle to devalue their own currencies against one another.

One country that has exempted itself from this practice has been Switzerland. This made the swiss currency a "flight to safety" currency on the same order as Gold.

Until this weekend, that is.

Yesterday Switzerland announced that they would buy unlimited quantities of foreign currencies to prevent the franc from rising above 1.20 Swiss francs to the euro.  In this way the Swiss National Bank (SNB) hopes to contain the meteoric rise of its currency, a rise that threatens its exports and economy.

This basically means Switzerland has moved to peg the erstwhile safe-haven franc to the euro and the last 'safe haven currency' in the West is now a carry-currency.

Gold now stands alone as the only island of stability in a world of fiat insanity.

It, therefore, should come as no surprise about what happened next.

With all Western central banks now actively managing a debasement of their currencies, what we witnessed this morning was an attempt to actively manage a debasement of gold too.

Take a look at this trading chart for Gold. Note the sudden divergence from the regular trading pattern (click on image to enlarge)...

The dramatic drop is an unmistakable attempt to prevent gold from moving beyond $1900/oz.

So what happened here?

In the span of 1 minute an enormous spike of 4,000+ contracts were dumped on the market in the middle of the evening during a time period in which gold trading is not normally known for this sort of volume.

Ask yourself the logical question.  If this was a hedge fund blowing out of a long gold position, why wait for such a low liquidity environment in which to execute such a massive trade knowing full well that by so doing, one would be guaranteed the worst possible exit price for the trade?

And since the price of gold has been rising and not falling, why would any gold long be forced to unload a position? It certainly is not under any duress from price action.

The next question that must then be raised is if this were a hedge fund doing the selling to establish a fresh short position, why would they sell in such size at such an hour guaranteeing themselves to be filled with a fresh short position at the worst possible price by selling into a hole?

The logical answer is that they would not do such a thing.

As the morning has moved along we now know that the Swiss National Bank, in an attempt to mitigate the "negative" effect on francs priced in gold, sold a massive amount of gold futures at the same time.

In total 7,000 contracts (700,000 ounces, nearly 22 metric tons!) were dumped on the Globex while London and NY were closed!

What we are witnessing today is exactly the same strategy that was employed with Silver in May: maximize the downward impact and collateral damage by executing the attack at a time of minimal liquidity.

Don't be surprised to see a number of margin increases leveled against Gold traders over the next few days.

Two things are certain here.

• The roller coaster ride is Gold/Silver will continue to be wild. 
• Gold & Silver may go down temporarily, but the rise in the metals is only just beginning. The manipulations can only temporarily quell the price in the face of voracious demand.

Presumably this is why Kazakhstan's Central Bank has just announced it intends to buy all of the gold that Kazakhstan's mines produce for the next 4 years.

As we have said before, if these Central Banks are buying Gold and Silver, do you really think we are in a bubble?

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Email: village_whisperer@live.ca
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Please read disclaimer at bottom of blog.