Get the checkbooks out, because the flight into gold is about to commence, says economist and NY Times best selling author Dr. Stephen Leeb. But a liquidity crisis sell off in gold may provide that opportunity, first.
The dramatic move by six central banks on Wednesday to lower dollar swaps rates flashed a big red light to markets that liquidity, which has been drying up between banks in Europe, had become acute and created the risked of another 2008 Lehman-like meltdown event, taking the U.S. banks along with Europe’s down the path to Armageddon. Sign-up for my 100% FREE Alerts!
“There are liquidity concerns right now. I think the world, and in particular Europe, really does have a liquidity problem,” Leeb told King World news on Monday. “If Europe has a liquidity problem that obviously has the potential to affect everybody, especially the U.S.”
Contrary to claims made by U.S. bank executives and analysts, featured endlessly on television programming (especially BofA’s cheerleader, Dick Bove), that U.S. banks are only marginally exposed to European sovereign debt defaults and could weather the storm, advisor to the IMF, Robert Shapiro, told the BBC that nothing that analysts such as Bove have said about the low possibility of a contagion in the U.S. could be further from the truth.
“If they [EU] cannot address the financial crisis in a credible way, I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system,” said Shapiro. “We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom; it will spread everywhere because the global financial system is so interconnected. [emphasis added]
In fact, one could argue that the Panic of 1907, which created systemic collapse on both sides of the Atlantic following the banking system collapse in the U.S., serves as a fine example of what would most likely happen to U.S. banks if Europe’s financial system collapses, as a higher degree of interconnectedness between many more banks between the U.S. and Europe exists today.
Following the announcement of Wednesday, initially, gold and stocks soared on the news of the central bank coordinated effort to ease the liquidity (ultimately solvency) strains, but, not unlike 2008, gold has since come under pressure.
According to Leeb, the weak hands of bankers need to raise capital, which leaves the most liquid asset they’ve got to raise quick cash, gold. But not to worry, said Leeb, the snap back to higher gold price could be as fierce as it was in 2008. He, instead, suggested preparing for the volatility lower in the price of the yellow metal prior to its glorious “rubber band” launch higher.
Don’t fight the inevitable volatility, instead, embrace it as fact of life during the bull market in gold, according to Leeb.
“We did see a similar event back in 2008 where gold dropped on liquidity needs,” he said, “but once central banks got their act together and once liquidity was flushed into the system, gold took off like a rocket ship. So you just have to expect this in the kind of world we are in.
“This is the kind of world that is consistent with a very powerful and persistent bull market in gold and it will carry many, many times higher than the gold price is today. But those very conditions are going to be conditions that do lead, from time to time, to liquidity crises.”
Many street-smart observers of the European drama suggest that the ramifications of a sovereign debt and banking system collapse are too unimaginable for political leaders to allow another Lehman, so the crisis will be resolved, one way or another, even if it means breaking treaties or progressing toward a plan in an undemocratic and authoritarian-like way.
But, if Europe does falter, count on the Fed to step in—to do the right thing.
“I think eventually they will do the right thing,” Leeb speculated. “I think that if they don’t do the right thing, we will. It’s a lot easier for the US to act as a single entity than it is for Europe to act.
“One way or another there has to be money printing.”
Leeb’s advice on the possibility of a gold correction as a direct result of a failure among Europe’s political leaders in their effort to flood of the financial system with a ECB printing press of euros is to prepare for the event, psychologically and financially.
“I can say this, right now is no time to back out of your gold position. I mean gold going down is telling you why it’s such a good investment,” Leeb explained. “It’s is literally being used as liquidity because conditions are so dire.
“Any way to correct these dire conditions is going to involve massive amounts liquidity. So buy gold on these dips and say, ‘This is a gift that will reward me in the next twelve months by at least a double or more.’ Let me put it this way, it’s a rubber band, the further gold goes down now, the more it’s going to bounce back.”