"Americans have become afraid of their investment markets. Finally, more than two years after U.S. stock markets hit their peaks and after the Nasdaq index has ALREADY plummeted by 72.8%, U.S. investors are beginning to accept the unthinkable. They are beginning to think that this is an actual BEAR market, a phenomenon which was confidently thought by most of them to be impossible."
Gold This Week Commentary - July 12)
You know what happened on the U.S. stock markets. On July 19, the Dow shed 390 points to close at 8019 - finally and resoundingly breaking BELOW the post 9/11 low of 8235 (closing basis) it set on September 21, 2001. Thus, the Dow joins the S&P 500 and the Nasdaq at new lows. Technically, there can now be NO doubt that the U.S. is in a BEAR market.
On Monday, July 15, President Bush gave a speech insisting that people get over the "hangover" of falling stock prices and demanding that they accept his word that the U.S. economy was still "strong". On Tuesday and Wednesday, July 16-17, Fed Chief Greenspan testified before Congress and he also, in unusually blunt terms, insisted that the economy was "sound".
Over the week, the Dow fell 7.66%. Over the previous week (July 8-12) it had fallen 7.41%. Over the first half of 2002 (all six months of it - Jan 1 to June 30), the Dow fell "only" 7.76%. The falling U.S. Dollar has long since impacted the broader market indexes. Over the past two weeks, the LAST holdout, the LAST remnant of the late and sorely lamented BULL market, the Dow itself has had its final resistance sapped. On July 19, the Dow fell to new post 2000 lows, confirmed ABSOLUTELY that its bull market is OVER, and gave up the fight.
In the wake of the "Roaring 20s", U.S. corporations were one of the standout scapegoats. In the wake of the "Roaring 90s" they have assumed that role again. The 1930s was the era when most of the "precedents" were set for the regulation of business - and stock markets. It was also the era when the great constraint of GOVERNMENT financial and fiscal malfeasance was removed. Individual Gold ownership was made ILLEGAL in the U.S..
The result has been seven decades in the making, the last three of which (since 1971) have passed with no constraints on government spending or borrowing WHATSOEVER. Gold and the U.S. Dollar were divorced completely on August 15, 1971.
Divide those three decades up into ten year chunks:
The 1970s were the era when no one was sure if the U.S. could get away with it. It was the era when there was still knowledge of the unprecedented step the world was taking. Never before had the key or reserve currency of the world been TOTALLY separated from Gold. Never before had EVERY currency had its CONVERTIBILITY into Gold removed. The result was a rampant rise in the prices of real goods of all descriptions, and a rise in the Gold "price" of 2330% - from $US 35 to $US 850.
The 1980s was the decade when the world came around to the notion that it could all "work". Two years of 20% plus U.S. interest rates lured the world out of Gold and back into U.S. Dollars. Then, the Dollar took off. This forced down prices of raw materials of all descriptions (most of which are traded internationally in U.S. Dollars). The cry "inflation is dead" began to be heard. Then there was the 1980s market boom, drastically punctuated by the 1987 Crash. Percentage wise, the crash of October 19, 1987 was bigger than the crash of October 29, 1929. But unlike the 1929 crash, the 1987 one didn't last. By the end of the decade, the Dow was above where it had been before the 1987 crash.
The 1990s was the GREAT MARKET BOOM. The preparation was laid between 1990 and 1992 when the Fed dragged interest rates down from 8.5% to 3.0%. The U.S. public had been reassured for a decade that the Dollar was a viable currency and that stock markets could overcome ANY setback (like the 1987 crash). To that was added the advancement of the U.S. to the position of the world's only "SUPERPOWER" with the demise of the Warsaw Pact and then the U.S.S.R itself in 1991. When rates began to fall in earnest, Americans first and then everyone else began to abandon all traditional means of "savings". They moved their money from bank savings accounts and real estate into the stock markets. The rest, and especially the great 1995-2000 market BOOM and BUBBLE is history.
This is IMPORTANT: It took nearly 25 years, from 1971 to early 1995, to convince American investors completely that a monetary system based on NOTHING but government "promises to pay" was not only viable, but a road to riches undreamed of. Once they WERE convinced, the markets had their biggest boom in history. But having been convinced, the American people have taken a LOT of "unconvincing" - they have held onto their article of faith with amazing tenacity.
They never knew HOW it "worked", but by all appearances, it DID work. It stopped working more than two years ago, but that didn't change the minds of most Americans. "Greenspan will fix it", they said. He surely tried, but he ran out of room to lower interest rates last December. "The government has a 'strong Dollar policy'", they said. But the Dollar topped out in July 2001, almost regained those highs in January 2002, and has been heading south with increasing speed ever since.
"THEY (the government) will fix it", they said. Well, they have sure tried. Mr Bush himself has promised to get tough with CEOs. He has told everyone that the economy is "strong" - twice - since July 9. Mr Greenspan has told Congress the same thing. It didn't work. They were not "believed". U.S. and world markets have TANKED.
And look at Gold. The world was finally CONVINCED that they could borrow and spend their way to riches FOREVER by the mid 1990s. In early 1996, Gold in $US began a LONG bear market. Gold did not perk up when U.S. markets topped out in early 2000. It did not confirm a bottom until April 2001. It briefly perked up when the Dollar began its free fall in April/May 2002, but then it stalled and went into reverse when the Dollar free fall accelerated in June/early July.
Understand this. For the vast majority of investors, who convinced themselves that the "new economy" was the ONLY game in town, the act of buying Gold would be an admission that they were absolutely dead WRONG. That is why most investors, even having seen the gross outperformance of Gold as an investment vehicle this year, have yet to take the plunge.
The significance of Friday, July 19 is that it is the day when the FINAL remnant of the "Roaring 90s", the Dow, bit the dust. It is also the day when the "Powers That Be" lost control of the stock market, the currency, and the $US Gold price all on the same day.
When EVERYTHING involved in the post 1971 era of "money" divorced from Gold is in a CONFIRMED bear market, Gold's time has COME. No, that doesn't mean that we will start seeing "limit up" days for Gold starting on Monday (July 22). What it means is that everything is now in place for an acceleration in what is already a Gold BULL market.
The only thing the U.S. government has left is a BIG distraction. And that's why the signs are proliferating so fast, all pointing straight towards a U.S. attack on Iraq. Problem is, with the markets having already tanked, that distraction may no longer be big enough. The other problem is that even if the U.S. does attack Iraq, and "wins", the financial and fiscal mess won't go away. And what is the U.S. going to do for an "encore"?