Last week, the spot future Gold price rose $US 1.10. This week, the price fell $US 1.00. The intra-day spread for the week - again on a spot future basis was high $US 277.00 - low $US 268.40. As you can see on the weekly bar chart to the left, Gold is regaining its "volatility".
As you can see on the daily bar chart, a solid run of daily advances was abruptly terminated on June 27 - which just happens to be the day when the Fed lowered interest rates again. This cut was 0.25% - all five previous cuts were 0.50%.
The main reason why this cut was 0.25% was exposed by the release of the minutes of the last (May 15) FOMC meeting which revealed dissention in the ranks of the Fed governors. While Mr Greenspan has spent the past five weeks insisting that he sees no signs of "inflation", the dissention at the MAY 15 FOMC meeting concerned exactly that issue. The dissenting governor wanted a 0.25% cut in May rather than the 0.50% one settled on because he saw an upsurge of "inflation" as being inevitable.
The problem for Mr Greenspan is that there are growing numbers of people OUTSIDE the Fed who see "inflation" as being inevitable. Now it is "inevitable" that inflation will not show up in the economic statistics which the government controls (like the CPI and the PPI), as long as there is any way to fudge the figures.
But there are also economic figures which neither the government nor the Fed can control. The Fed, for example, cannot control longer-term U.S. interest rates. And the fact that inflationary expectations ARE on the rise is best shown by the stubborn refusal of longer-term Treasury bond yields to fall along with short-term yields.
Please consider this data:
At the end of 2000, the Fed Funds rate was 6.50% - it is now 3.75%
At the end of 2000, Treasury 10-year bonds yielded 5.10% - they now yield 5.40%
At the end of 2000, Treasury 30-year bonds yielded 5.40% - they now yield 5.75%
Consider further the fact that on Friday, June 29, Federal Funds were trading at 4.25%! That is a not inconsiderable 0.50% (50 basis points) ABOVE the target of 3.75% set by the FOMC only two days earlier, on June 27. Why is this happening? Well, one reason could be the announcement, also made on June 29, that the NET external debt of the U.S. rose by 44.1% - from $US 1.52 TRILLION to $US 2.19 TRILLION - in 2000!
Gold, of course, continues to trade sideways. Over the two days June 27-28, with the announcement of the rate cut stuck right in the middle, the spot future Gold price (on a closing basis) dropped $US 6.20 - from $US 276.20 to exactly $US 270.00. How piquant!
The stage is set for some potential fireworks after the FOMC meeting. Stay tuned.
(The Gold Bottom last week)
Fireworks there were, as on June 28, the $US Index soared by 1.61 points to a new post-1986 high of 120.29. At the same time, the yields on Treasury paper across the maturity spectrum were RISING! Welcome to Wonderland! The catalyst was an announcement by a "Senior Treasury Official". This official was quoted as stating that the U.S. had NO interest in participating in any currency interventions to prop up the Euro or any other currency. Presto, the currency markets stormed the Dollar - for one day.
The Gold bottom remains intact - there is no "bull" market. It has by now become blindingly obvious that no more U.S. rate cuts are justified. If and/or when they DO happen, they will signal PANIC by the Fed. Don't forget, there is a Finance Ministers summit in Rome next weekend and the G-8 Heads of State summit in Genoa, Italy begins on July 20. Short trading week this week, as the July 4 holiday falls on Wednesday.