Gold

[JessieHanz]

Well, if your are not pretty sure in investing on golds, then maybe just think of another alternative where you can make a wise investment.. like a good business or a real estate perhaps..

[BigBlonde]

Here's an article which gives some idea of the mess being created that will affect real estate, business, families, you and me. The problem today is that folk seem to have blind faith in those at the top to do the right thing when in fact what does it matter to them, Politicians, bankers, business leaders - even if it all goes bang they're OK because I've never met a poor one yet and their lifestyles are never changed even if they get it vastly wrong. They never pay for their mistakes whereas the rest of us would be fired on the spot for gross incompetence - they get a pay-off and a well paid post on the board somewhere else. Who's the fool - those that pick up the tab for the mess! Read on please:

The World’s Third-Largest Bank is Bust!

By Simon Caufield, Editor True Value

The world’s third-largest bank is bust.

It is a US bank with $2.55 trillion of assets. Only BNP Paribas, and Royal Bank of Scotland are larger. It’s way too big to fail.

When it goes bust, it will be bailed out. And Ben Bernanke, chairman of the US Federal Reserve, will have no choice but to fire up the printing presses all over again.

Today, I want to tell you how to protect your wealth against the inflationary impact of the dollar flood that will result.

But first, let’s talk about exactly how banks make money. And how they go bust…

How banks make money

Let’s start with the balance sheet. A bank’s assets are mainly loans made to individuals, businesses, even governments. Loans are assets because they are money owed to the bank.

Now let’s talk about the other side of the balance sheet – the liabilities. Most of the money a bank lends to customers comes from money that the bank itself borrows. It can borrow from you and me through the savings we deposit. It may also borrow from companies that place cash on deposit. And the bank may borrow from investors – insurance companies, pension funds, even other banks. All of these are liabilities – debts the bank owes to someone else.

The other main item on the liabilities side is capital. Suppose the bank collected all the money owed by the borrowers. And then repaid all the money it owes. Capital is the money left over. It is the bank’s true value.

The balance sheet must always balance. So capital + debt = assets.

Banks make money by lending at higher interest rates than they pay to borrow. Borrowers want long-term loans, usually at fixed interest rates. On the other hand, depositors want easy (short-term) access. And depositors often prefer variable interest rates.

So this is the crucial role banks play in the economy. They take short-term variable rate savings, and recycle them into longer-term, fixed-rate loans.

And this is where the problems of the world’s third-largest bank start.

How a bank goes bust

From the point of view of a bank, when interest rates rise, the value of a fixed-rate loan falls. The bank receives less income from that fixed-rate loan than it could now get elsewhere.

And interest rates on US ten-year government bonds have indeed been rising. Since last August, they’ve risen by about one percentage point.

Now, accounting rules dictate what happens next. Under certain conditions, banks must mark down the value of these loans. That’s called ‘marking to market’. And when it happens, capital also falls – otherwise the balance sheet doesn’t balance any more.

But the world’s third-largest bank doesn’t follow the same accounting rules as every other bank. It refuses to restate the value of its assets. That’s why they’re surely worth less than the reported figure. In fact, if I’m right, the bank has no capital left. It has zero value. It’s bust.

I can’t prove this. But here’s why I think I’m right.

$1.14 trillion (45%) of this bank’s assets are fixed-rate loans of ten years or more. Let’s suppose the ten-year bonds pay interest of 4%. If the yield rises to 5%, the price falls by about 8% (bond prices fall as yields rise). If yields rise to 6%, the price falls by 16%.

I don’t know exactly when the bank made these loans. So I don’t know the current yields or prices. But I do know that US government bond yields have risen by one percentage point since last August. And I think they’ll keep going up.

So it’s a fair bet that the bank’s ten-year loans are worth less than it paid for them. An 8% loss on $1.14 trillion is $91 billion. And that excludes any losses on the $1.41 trillion of shorter loans that it holds, which are also affected.

This bank has been lending like the credit crunch never happened

Of course, bank capital (as well as loss reserves) is designed to cushion against such losses. Since the credit crisis, most banks have reduced their lending, boosted reserves and raised more capital.

But not this bank. It carried on lending like the crisis never happened. Worse still, it has no loan loss reserves. And it’s not raised a cent of extra capital.

Want to guess how much capital the bank holds against its $2.55 trillion in assets? $53 billion. That’s just 2% of total assets. So a 2% fall in the value of those assets would wipe out every last dollar of capital. So it may already be insolvent. If not, it soon will be.

Have you guessed which bank I’m talking about?

It’s the US Federal Reserve Bank itself.

The Fed is bust – and that’s not just my opinion

I’m serious. It may be the US central bank, but it’s still a bank like all the rest.

Most of its assets are US government bonds, bought as part of its quantitative easing (QE) programmes.

Its liabilities include about $1 trillion of notes and coins in circulation. There are also $1.4 trillion of deposits owing to US commercial banks, which are required to hold reserves at the Fed. There are also some deposits owed to the US Treasury. And there’s $53 billion in capital.

So the Fed can go bust just like any other bank. And I’m not the only one saying it. William Ford, a former president of the Atlanta Federal Reserve, one of the 12 member banks of the Fed itself, broke ranks to warn about it on 11 January.

Ford points out that the Fed can hide insolvency because it does not mark its assets to market. So we’ll only know that it’s bust when it sells some bonds. Only then would it have to take the losses from selling them for less than it paid.

Of course, the Fed going bust would be very embarrassing. So you can be sure it will be quietly bailed out behind closed doors. In fact, if the bail-out is timed to coincide with the losses, we might not even notice.

Who will bail out the Fed?

Why does this matter to you? Well, guess who would rescue the Fed? The US Treasury, a department of the US government, would have to inject extra capital to restore solvency. But the US government is not exactly flush these days.

So how would they get the money? They’d issue more bonds. And the Fed would buy them as part of its QE programme.

So let’s be clear. The Fed goes bust. So it lends money to the US government (i.e. it buys US bonds), and the US Treasury gives it back to the Fed as capital. So the Fed is printing money to bail itself out. What do you think this will do for investor confidence in the US government and the dollar?

I’m pretty sure that the value of US Treasury bonds and the dollar will be worth less afterwards. And that’s why you should have 8-12% of your portfolio in gold. It is sound money in an era when most currencies are not. It is insurance against further debasement of paper money.

He's not alone in what he thinks and there's plenty more evidence out there to back it up - but if in doubt take note, sit back and see what happens - that's what most people do anyway until it's too late and then start crying because they're "victims" of the deceit.
Wake up and smell the coffee. Let's face it we're all sitting ducks unless you've got a secret fortune hidden away;

[Frugal]

I would be very wary of gold. How can you make money on it, when it costs so much to buy in the first place, and there are laws regulating it rather carefully?

[timdaily]

Every one should invest in gold.. I am rich because of gold

[97guns]

they CAN NOT print gold into oblivion, it will never get diluted down like your dollar.

if i went to a bar and bought a drink as watered down as the dollar is i'd definately be looking for a new bar.

the us dollar is diminishing right before your eyes and YOU SHEEP ARE TOO STUPID TO REALIZE IT, you just keep following each other. the wolves will get you soon.

[steveaz67]

Very long recovery period for precious metals. Diversification is the key.

[jteezie]

I wouldn't buy gold unless I lived my life in constant fear and was very attuned to the scary stock markets... and then I would act contrary to my feeling... but that would be impossible to do given my nature.

There are better ways to invest in fear at lower cost and risk. Try options contracts.

Eh, I guess it really comes down to what you think "money" means.

[BudgetMath.com]

I actually purchased a bunch of a shares of a gold trust fund (GLD) in January and just sold them all for a very nice profit. I was planning on holding the stock for at least a couple of years. But the price of gold per ounce has been hitting all time highs almost every day recently, it seems.

So IMHO... now is a great time to sell your gold stocks if you are holding. One must wonder how much longer this can go on for. It's crazy!