"Last week, in the wake of the "suggestion" from the Fed economist, the $US Gold price fell and the $US index, after having fallen for five straight weeks, rose. This week, the $US spot future Gold price hit its highest closing level since February, and the $US index fell again. And, of course, in the middle of the week, the Fed met and decided to do nothing about U.S. interest rates."
(Gold Commentary - June 30)
"Sustainable rally, my aching *!?$%. Gold has spent the whole month of July falling. On June 30, it closed at $US 291.50. Now, it's $US 281.90 - almost $US 10 lower. Some rally!" Most people didn't notice Gold go up, and they haven't noticed it come down either. But of those who do have some interest in the Gold price, that is the overwhelming reaction to what has happened over the past two weeks.
In fact, what we are looking at is this. Gold gained $US 23.60 in the four weeks between June 2 and June 28, and has spent the past two weeks giving almost exactly half of it back. Quite a normal reaction in any market, but especially in one which has been in the doldrums for a LONG time after having gone nowhere but down for an even LONGER time.
We pointed out that Gold was "a political metal" when we first began these commentaries in January 1996. We pointed it out long before that in The Privateer. The proof is obvious. Could any government today finance their activities unless they had full and complete control over what is used as money? Of course not. Could any government carry the debt levels they carry today if the paper they issue was freely REDEEMABLE in Gold? Of course not.
So how can a "Gold rally" be sustainable? It can't, as long as governments maintain complete control over both domestic and international financial system. But such complete control sometimes slips, and that is when Gold does rally.
Alan Greenspan made a very interesting comment during a speech given over this past week. He said that future "financial crises" were "inevitable". He was vague over what makes these crises inevitable, he didn't say much about what would trigger off the next one, and he said nothing at all about where it might start. All he said is that the phenomenon is inescapable, and we had better be prepared for it.
If you cast your mind back over the almost 20 years since the end of the last major U.S. recession in 1982, can you find a nation in which a financial crisis has NOT happened? We can find only one - the United States of America. Sure, there have been no shortage of potential crises over that long span of years. Everything from the Social Security mess in the early 1980s, to the 1987 crash, to the S&L meltdown in the late 1980s, to the government shut downs of the mid 1990s. But none of these "potential" crises has turned into an actual one in the U.S..
There are two fundamental reasons for this. First and foremost, the U.S. prints the world's reserve currency, the Dollar. Second, and a result of the first, the U.S. has been a magnet for investment capital from all over the world ever since the early 1980s. It is not farfetched at all to say that the world has put most of its eggs in one basket, that basket being the U.S. Dollar in particular and U.S. investment markets in general. The result? The U.S. was still a net international creditor in 1982. It became a net international debtor in 1995. And it is now by far the biggest net international debtor the world has ever seen. A LOT rides on the strength of the Dollar.
As you probably know, the Dollar has not been quite as strong as the world would like it to be lately. In June, the Dollar index came off sharply, and not so coincidentally, Gold rallied in $US terms. But over the first two weeks of this month, the Dollar has rallied, and again not so coincidentally, Gold has given back half of its June gains.
The situation is simple. The US the world's largest debtor and is increasing that debt at a present rate of between $US 400 and $US 450 Billion a year. In order to prevent that debt increase from impacting on the U.S. economy and on U.S. financial markets, there must be an offsetting inflow of foreign capital. With U.S. markets having powered ahead ever since 1995, the inflow has been maintained.
But over the past two months, unease about the sustainablity of the U.S. economic and financial boom has been breaking through to the surface. The BIS warned against the perils of a Dollar slump a month ago. More recently, even the U.S. controlled IMF has come out and stated that more U.S. rate rises are definitely going to be required to keep the "financial imbalances" present in the U.S. in check.
The Privateer has long maintained that the U.S. was "safe" as long as the Dollar remained strong. Over the past six weeks, the Dollar has weakened, and then strengthened. Over the same period, $US Gold has strengthened, and then weakened. Over the past week, Gold has gone down a small amount against the Dollar, but has remained unchanged against most other major currencies. So far, Gold remains intact. And after having fallen precipitiously for month, the new "rally" on the Australian Gold index remains intact too.
The first danger to "business as usual" will come early next week, when the Bank of Japan meets. The BOJ has stated as clearly as anything is ever stated in official Japanese circles that they intend to end their zero interest rate policy. Then, starting on July 21, the G-8 meets in Okinawa. Mr Greenspan himself has said that another financial crisis is "inevitable". When? Where? He didn't say. But the signs to watch for are clear. Will the $US Dollar rally continue, or will it falter. In the absence of further rate rises from the Fed, that is more and more up to foreigners. Either they continue to pump investment capital into the U.S., or they don't.