By David Bradshaw
Editor, Real Money Perspectives
Sept. 17, 2008
U.S. stocks fell 4-5% as the government's rescue of AIG failed to stop financial hemorrhaging while credit conditions tightened sharply. Meanwhile, gold prices soared 11% -- the steepest rise in history -- as investors made a flight to safety.
"Wall Street is facing a valuation crisis as the Fed measures out punishment for the credit excesses it helped to create over the last decade. Gold is rallying because it is the only asset on earth with absolutely no third party risk," said Swiss America CEO Craig R. Smith.
The Federal Reserve held rates steady at 2% on Tuesday but so far has injected 120 billion fresh dollars into overnight "repos", the most money since Sept. 11, 2001, in the wake of the Fannie/Freddie/Lehman bankruptcy and another $85 billion in last night's AIG bailout.
This creates monetary inflation and will further weaken the U.S. dollar. Volatile stock markets and a lack of confidence in the banking system and paper currency has boosted demand for gold since 2001.
"Historically government bailouts make things worse over the long term, despite attempts to boost confidence in the short term. But gold rises above any confidence crisis because it creates confidence rather than depending on it," said Mr. Smith.
Gold is a pure asset with no counter-party risk to owners; unlike stocks, bonds, T-bills, currencies and even government debt, as Swiss America has said for over a quarter century.
CNBC contributor Rick Santelli agrees, today saying: "There is no counter-party risk when you hold Kruggerand gold coins. Investors are flocking to the metal amid a tidal wave of stock market uncertainty."
The US economy today is on a knife edge, toggling between recession and inflation, also known as stagflation. This means the next bailout beyond U.S. banks could be the dollar.
"This is not a time to panic, but rather to pause and reflect. I believe the U.S. economic system will emerge from this present financial mess much stronger if we learn from our mistakes rather than repeating them," says Craig.
"Wall Street stocks may fall to zero, but gold has never failed. The #1 reason to own gold is for safety and protection. Gold is still an excellent value today, but remember: safety first, then profit," said Mr. Smith.
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