The U.S. banking stress tests are released soon, and the delivery of the results may have massive ramifications for equities and for the Usd. Results now show that global central banks are undercapitalized in regard to reserve valuations, with the Fed leading the way regarding forward debt commitments, pushing real gold values towards $5000.

$5000 is unrealistic? Maybe, but perception and reality really have merged into a very grey area since July 2007, and following the line in Alice in Wonderland, Things get curiouser, and curiouser....

The reality seems to be that U.S banking, when compared to overseas counterparts, is anything but ‘safe' and that the flight to Usd safety may reverse more quickly than it started if equities find buyers after all of this noise. Risk tolerant investments in the financial sector could lead the move away from Treasuries and the dollar. If equities hold steady the new global investment rule book could push excess funds to the ‘safety’ of overseas banks, a double whammy for the Usd.

Add in the ultimate move to safety being away from paper and into hard assets and the Usd looks hard pressed to show appreciation through 2009/10. Treasury paper is getting to extreme levels and is really pushing the envelope in regard to ‘trust’ in the fact that the Fed can back all that it is issuing and buying. There are 1.559 trillion dollar bills floating about in M1 money supply numbers that are backed by just 286 million ounces of gold. No wonder the U.S. scrapped the Gold Standard in 1973 and moved instead to predominantly paper reserves. If each dollar bill needed to be backed by the gold reserves in place the equation would go like this;

1.569 trillion dollars (M1), divided by 286 million ounces of gold (Reserves), equals $5400 an ounce.

Welcome to the new Gold Standard. The same equation for all central bank reserves compared to gold holdings offers gold at $5000 if repatriation of paper debt took place. This is not a specific Federal Reserve (or Federal Non-Reserve?) issue, it is a global issue that has put far too much weight on paper debt. The Fed issue lies in the sheer volume of debt that the U.S. economy runs on, and on the fact that a drop in GDP (growth) to Debt (Treasury note) ratios could send a lot of dollars back to the Fed to cash and honor.

U.S. GDP shrank 6.1% in the first quarter of 2009, that is double the Stress Test criteria for banking capitalization, and as such has further pressured the GDP/Debt ratios. With that in mind the flight to Usd ‘safety’ may now have its wings clipped.

The widely anticipated banking stress test results will be made public on May 7th, and will no doubt create volatility in the market place as the figures and information are finally released. Forex traders will be interested to see the impact on the Usd, and where things go from here.

“The flight to safety of the Usd whilst the credit crisis unfolded may have been over-played”, said Trade Team, “and it could be a very rocky road for Treasury note values, and by default the Usd, over the coming quarters. Global markets do not see the U.S. banking sector as safe at all when compared directly to its overseas peers, and in reality the flight to safety may now have serious questions to answer” they said.

“By stress testing the U.S. banking system the Administration are testing a very weak industry that is a long way from the safety of European, Australian, and to some extent Canadian, Middle Eastern and Asian counterparts it seems. The results may be good for the Administration to pontificate about, but may not help in any way the dollar to hold technical support areas that are close to current valuations”.

It may not be next week, it may not be next month, but it looks extremely hard for the Fed not to get its wish of a de-valued Usd.