FULL FAITH AND CREDIT

After the downgrade of 7 European countries last week, the bailout fund, EFSF, has also been downgraded. This is likely to increase borrowing costs and impact the amount of funds available for bailouts. Everyone seems to be behaving as if this is of little consequence. I disagree. Keep in mind that any currency is supported by “The full faith and credit” of the government and downgrades on government debt is an indication of loosing faith.

MORE DEBT TO SOLVE TOO MUCH DEBT

Italian banks borrowed over $63.5bn from the European Central Bank’s (ECB) new long term lending operation according to a report published by Morgan Stanley. The report suggests that Italian banks have now covered 90% of their financing needs for 2012, according the Financial Times. Spanish banks took $31.8bn or 1/3 of their funding needs for the year.

This new cash injected into the banking sector has lowered credit default swaps (CDS) costs used to insure bank bonds versus sovereign bonds, a unique occurrence. It has also resulted in the “appearance” of successful short-term sovereign debt auctions. It’s kind of like this; I own an ice cream shop and offer everyone the money to buy my ice cream. I bet I could sell a lot of ice cream! I would also be more in debt.

EVEN MORE DEBT TO THE RESCUE

There is another ECB funding operation scheduled for February 29. It is anticipated to total 1 trillion Euros. We need to keep our eye on this because the first round of Greek debt matures on March 20, 2012 and at this point, no creditor agreements have been reached, though there is talk of a 70% haircut to private bond holders (banks, hedge funds, insurance companies). Frankly, it is ridiculous to assume no ill affects to the $32tn CDS market should a default occur. Anything less than 100% repayment is a default and is likely to be a game changer and not in a pretty way. I will keep you posted.

POWER TO THE PEOPLE

Bowing to the power of the internet, several key lawmakers withdrew support for anti-piracy legislation after a 24 hour blackout by thousands of websites Wednesday. Members of congress had to deal with angry constituents that flooded their offices with emails and phone calls after experiencing those blackouts. Concern over freedom-of- speech rights were behind the blackouts.

NOT HAPPY

A record 84% of Americans disapprove of the job Congress is doing, with almost 2/3 saying they “disapprove strongly.” Could this undermine faith in our government?

STOCKS

The January rally in stocks is in place. You can see in the chart below that the Dow closed right on resistance. If it can close above this, you could expect to see a test of the next resistance level above that. It is anticipated that the Feds will announce additional money injection. Stocks like that, since once created, money must go some place. Caution is advised however, since we have the CDS issue looming large.

The chart below shows you what is happening with the US Dollar versus the Euro dollar. Both are now inside a trading range between resistance on the top and support on the bottom. Just remember that currencies are supported by the full faith and credit of the government and in all cases, and both faith and credit are slipping.

Now let’s look at real money, gold and silver. It was a good week in the spot market. Spot gold started the week at $1630.80 and ended the week at $1668.00. Spot silver had a good as well, starting the week at $29.52 and closing the week at $32.20.

Sales at our bullion wholesaler saw some brisk days with both spot gold and silver up quite nicely this week. Availability on gold bullion and semi numismatic coins is good, but they are short on 90% bags of dimes, quarters and half dollars. Therefore the premium on the buy/sell has gone up.

We also saw some upward price movement in the numismatic market, as the second cup formation might be coming to conclusion. Availability is good right across the board.

That wraps up the wrap up. I must say that this gets more and more interesting as we come closer to conclusion on this CDS issue. Though frankly, I am not in a rush to see what happens. Stocks, bonds, currencies and metals need to be in place to deal with the probable shock to the market. Remember, CDS’s have only been around since 2004, so their response to a default has not yet been tested. It is not often I can give a date, but March 20 will be the test unless enough new money is created to payoff all of this debt. And if they do create enough to payoff Greece, Italy, Spain, Ireland, Portugal, the US etc. what do you think that will do to currencies? Are you ready?

Be safe and as always, we are here when you need us.

Lynette