It is not hyperbolic to say that last week the world’s central banks averted a worldwide financial meltdown. And, it is not an exaggeration to say that the public’s response was a yawn.

The central banks prevented the meltdown by “injecting” massive quantities of freshly-created monies into the markets. No new wealth was created, but billions of intrinsically-worthless fiat currencies were brought into existence to handle the financial contagion that was brought on by the subprime mortgage mess. Jochen Sanio, Germany’s Financial Regulator, called it “the worst banking crisis in Germany since 1931.”

The mortgage industry created the mess by lending money to people who were not capable of repaying it. (Remember the ads: If you can afford to rent, you can afford to own?) To get rid of this low quality paper, which has been dubbed “toxic waste” in financial circles, the industry, with its cohorts on Wall Street, rolled the paper into CDOs (collateralized debt obligations) and sold them to banks worldwide.

When it became evident that the subprime CDOs were not worth their face value, the overnight lending rates between banks spiked as banks became nervous about lending to each other. In stepped the central banks, doing only what they are capable of doing in a monetary crisis: print more money.

According to a Reuters report, the Fed “provided” the banking systems with $38 billion on Friday, August 10, the largest single amount of “liquidity” added in the aftermath of September 11, and that was the second day of intervention, with $24 billion having been “infused” Thursday. According to Bloomberg, the ECB loaned 61.05 billion euros ($83.6 billion) after injecting a record 94.8 billion euros of funds the day before.

Worldwide, central banks injected at least $326.3 billion within 48 hours “to prevent markets from spinning into a global liquidity squeeze.” Inflating with the Fed and the ECB were the Bank of Japan, the Reserve Bank of Australia, and the central banks of Norway and Switzerland. Denmark, Indonesia and South Korea said they were ready “to provide cash.”

What we just had was massive inflation of the world’s money supply. But, will the dollar sink because of this specific inflation? Perhaps not immediately because other central banks around the world inflated their currencies right along with Fed. Actually, the ECB inflated the euro in greater quantities than the Fed inflated the dollar.

I suspect the public’s response (non-response?) was because of its lack of understanding of the severity of the crisis. Further, the public seems to accept the notion that central banks are all powerful, capable of handling any monetary crisis. And, why not? Isn’t that the impression conveyed by establishment financial publications, such as The Wall Street Journal, which are staffed by writers supposedly knowledgeable about economics and financial matters? Isn’t Ben Bernanke, the present Fed head, the most brilliant economist alive today?

Besides, didn’t the world’s central banks just avert a crisis? Yes, they did, but not without a price, which will be paid in the future as the massive, newly created intrinsically-worthless fiat currencies circulate through the world’s economies and bid prices higher. Monetary inflation begets price inflation, as surely as night follows day. The greater the money creation, the worse the price inflation. It’s only a matter of time.

Perhaps, what has really come out of the subprime toxic waste mess is that the central bankers have revealed their only solutions to monetary crises: print more money. Jean-Claude Trichet, president of the ECB, said it is “giving the markets the appropriate liquidity.” But, more on target was the assessment by Alice Rivlin, a former Fed vice chairman who’s now at the Brookings Institution in Washington, “The Fed has almost unlimited ability to supply liquidity if they feel that is appropriate.” Perhaps more telling that central banks stand ready to print is the story about how Fed head Ben Bernanke got the moniker of “Helicopter Ben.”

In a 2002 speech before the National Economists Club in Washington, D.C., when Bernanke was a member of the Board of Governors of the Fed, he talked about deflation. Basically, he said that no one should fear deflation because “control of the means of production for money implies that the government can always avoid deflation by simply issuing more money.” Then he alluded to a statement made by Milton Friedman about using a “helicopter drop” of money into the economy to fight deflation.

As the subprime mess was addressed with helicopter flights, so will all other future financial crises. Inflation is the future. As more and more people learn the true nature of today’s monies, it will usher the dollar and the world’s other fiat currencies further down the road to the graveyard that awaits all fiat currencies. Gold bullion and gold bullion coins and silver bullion are appropriate investments for the times.

Pierre Lassonde, vice-chair at Newmont Mining, the world’s second largest gold producer, told the Australian Diggers & Dealers Forum that he sees the gold price moving towards “three zeros and a figure in front.â€? He was not sure whether that figure in front would be a one or what. His optimism for gold apparently is because of his fears that the US current account deficit will push the dollar down, with a resultant “tsunami of liquidity around the world.â€?

Lassonde gave the Forum a six-point forecast that should interest precious metals investors:
The bull market for minerals will last for at least another 20 years, and while the drivers of China and India may have soft moments, they will be an ongoing force for minerals and metals demand.

The US dollar will plunge through the massive current account deficit though the size of the country’s economy was unlikely to create a recession in the next few years.

The Canadian dollar will like reach parity and beyond with the $US while the Australian dollar will make further inroads on the Greenback.

Copper and molybdenum are two metals that may experience a weakness, though oil, gold, platinum and nickel will maintain strength.

Since the 1990s the Dow Jones Average marker has had a fluctuating tussle with the gold price including a nadir for the metal in 1996 when the Dow was 28 times greater. The two were now moving into balance and could see gold move to a 2:1 status in the foreseeable future.

The gold price could reach $US750/oz by the end of this year and $US850/oz in the following 12 months.

Also discussed at the Forum was the huge success of exchange-traded funds (ETFs). Lassonde boasted that the World Gold Council, under his guidance, birthed the most successful ETF, which holds 90% of the gold in ETFs. The total amount of gold held by the world’s four major gold ETFs rose to record levels last week.

Meanwhile, news out of Spain gave concern about the price of gold over the short term.

With no gold sales during June, Spain’s central bank resumed sales in July, dumping 800,000 ounces or 25 tons. That puts the bank’s sales to 149 tons under the Central Bank Gold Agreement (CBGA) year that ends September 26, 2007. The big question now: Will the Central Bank of Spain dump still more before the CBGA year ends?

The CBGA limits sales to 500 tons a year among the signatories, and with only six weeks left in this CBGA year some 150 tons are still eligible to be sold. So, will Spain’s CB rush to sell so that it does not have to stand in line next year behind the banks that have already spoken for allotments?

If the 500-ton limit were to be met this CBGA year, then the weekly rate of CBGA sales would average about 21 tons. This would be an added load on the gold market, which has easily absorbed CBGA sales that have averaged eight tons a week for the year. The average for July was 17 tons.

If the Spaniards dump, gold investors, such as those who keep adding to their ETFs’ positions, may have opportunities to buy at lower prices. Not a prediction, just an observation. Frankly, I like the gold market right now, and believe, as does Pierre Lassonde, that gold will see four digit prices. I also agree with Lassonde that this precious metals bull market has a long way to go. I’ve been saying fifteen years; it good to hear someone like Lassonde say twenty.

For over a decade, gold bulls lambasted the gold mining companies that were hedging their production. But, while gold prices were falling, the mining companies ignored the complaints.

Barrick Gold Corp even bragged that it was not a mining company but a “financial house.” Now, they’re singing a different tune.

A resouceinvestor.com article discusses Barrick’s and Newmont Mining’s woes in dumping their hedge books. Mineweb.com also has an article on industry dehedging.

Meanwhile, miners in South Africa seem set to strike, which, if it comes about and lasts some time (doubtful), should result in higher gold prices.

In June, the Swiss announced they would be selling 250 tons of gold over the next two years. A few weeks earlier, the European Central Bank disclosed that it had sold gold. (See the June 14 and June 5 blog posts.) Now, the Italian Parliament has issued a resolution calling for the Bank of Italy, the Italian central bank, to sell some of its reserves and use the proceeds to reduce the country’s national debt. Immediately, of course, the media reported that Italy was going to sell gold.

A closer review of the resolution, however, reveals that Parliament called for the sale of “reserves,” which also includes dollars, British pound sterling, Swiss francs and Japanese yen. Yet the media chose to talk about “Italian gold sales.” The Italians could be selling dollars as well.

Additionally, a Financial Times article, presumptuously titled Italians to use gold reserves to cut national debt, noted that the Italian central bank, under European Union membership rules, is autonomous. The central bank may not agree with selling its reserves to cover deficits incurred by a profligate Parliament. In February 2006, Germany’s central bank effectively blocked the German government’s proposals of selling gold to fund research and development projects.

The idea that Italy may sell gold is readily accepted because of current thinking about gold. To many economists, gold is an “18th century” anachronism. Few economists understand, and fewer accept, the classical theory of money, and today they consider computer entries to have value equal to, or greater than, gold, which has had value in civilizations. Computer-entry money, of course, has no intrinsic value.

Still, it must be recognized that the Italians may sell. In recent years, France, Holland and Germany have sold some of their central banks’ gold.

Would any Italian sales significantly impact the gold market? If so, the sales will have to be in the next few weeks.

Under the Central Bank Agreement on Gold, of which Italy is a signatory, fifteen European nations have agreed to limit gold sales to 500 tons a year. For 2008, 345 tons have already been reserved by other signatory banks, leaving only 155 tons open to the Italians in 2008.

However, this CBAG year, which ends in two months, is 145 tons short of the 500-ton annual cap. Considering the pace at which bureaucratic wheels turn, it is unlikely that any Italian gold will be sold under this year’s CBAG. If no other European central banks report additional sales in the next two months, signatories to the CBAG will fall short of hitting the 500-ton annual cap two years in a row. Last year, sales under the CBAG were 100 tons short of the 500-ton cap. Perhaps, reduced gold sales under the CBAG suggest that even central banks are beginning to see the need to own gold.

And, that seems to be the gold market’s view, with no sell-off on the news.