The U.S. seems to be on the brink of war with Iraq. Mr Bush and co are dismissing anything and everything coming from the Iraqi government and are all but demanding that both the Congress and the UN give them "carte blanche" to invade.
The U.S. economy seems on the brink too. The current account deficit is running at a $US 500 Billion annual clip. Inventories are at 18 month highs. Consumer confidence is cratering and housing starts are too. Both consumer and business borrowing is surging at its fastest level for a decade.
Japan is definitely on the brink. No sooner has the Japanese government unveiled their latest plan to buy up stock held by the debt laden banks than they hold a ten year government bond auction. Shock - HORROR! For the first time in the history of such auctions, stretching back to 1989 - there are not enough bids to cover for the amount of bonds on offer. We have more to say about this in the Late September issue of The Privateer - published on September 21.
World stock markets are on the brink. The German and French stock markets hit new 2002 lows this week with the FTSE in Britain not far behind. Japan, despite all the efforts of the government, is still hovering perilously close to the 9000 level - the level at which the capital adequacy ratio of Japanese banks is in the red.
And, of course, US stock markets are back on the brink too. The Dow dipped back below 8000 on Thursday, Sept. 19. The Nasdaq closed only 10 points above its 2002 low close on Sept. 19 at 1216. And then there are the "downgrades", most significantly to JPM. On September 19, JPM closed BELOW the $US 20.00 level at $US 19.87 - that's a new 2002 low and a fall of 26% in less than a month. $US 20.00 is touted to be the level below which JPM's "derivative book" (all $US 26 TRILLION or so) comes under pressure.
And what about Gold? Well, Gold closed this week at $US 322.20, up $US 5.20 on the week (in the face of a stationary $US index) and 1.75% below its June 4 2002 high. At one point early in the week, Gold traded all the way down to $US 313 as Iraq announced that they would comply with UN resolutions and the world briefly decided their might not be a war after all.
That fall happened in Asian trading, and it lasted mere hours. By the time that trading had got around to the Comex (on Sept. 17) the end result was a fall of $US 0.20.
So, Gold hovers just below its 2002 highs - with U.S. stock markets hovering just above their 2002 lows. The bull market which began in April 2001 - almost a year and a half ago - is still perfectly intact. So is the correction from the June 4 2002 highs which is now nearly four months old.
Behind the scenes, it is taking more and more "brinkmanship" on the part of Gold traders and Gold "market makers" to keep Gold comparatively subdued. Focussing on just one instance of this, consider Gold lease rates
The last time that the Fed (which meets next Tuesday - Sept. 14) actually moved U.S. interest rates was on December 11, 2001 when the Fed Funds rate was lowered by 0.25% to its present level of 1.75% - approximately the same level as the three-month Treasury bill rate. On that day, December 11, 2001, the three-month LIBOR lease rate on Gold stood at 0.930%
On Friday, September 20, 2002, the "target" Fed Funds rate had not moved from its level of December 11, 2001. The three-month Treasury bill had seen its yield fall by 9 basis points or 5.2% from 1.75% to 1.64%. But the story on the Gold three-month lease rate was QUITE different. On December 11, 2001, it stood at 0.990%. On September 20, it stood at 0.256%. That's a fall of 73.4 basis points or 74.1%. The lease rate has fallen almost three-quarters of the way to ZERO so far this year.
This is "brinkmanship" of awe inspiring magnitudes. There is, in effect, no risk for a "Gold Dealer" (read Bullion bank) to borrow Gold from a Central Bank. Of course, there may be a risk involved in what the "Gold dealer" does with the Gold once it has been borrowed.
As long as Gold stays below its 2002 highs and preferably below 330, the enormous derivative position is comparatively "safe". As long as Gold stays below that level, the risk (to the Central Bankers) of a rush out of currencies into Gold is comparatively mild. And as long as Gold remains in its present correction, there is little if any chance of lift of in the gold stock sector.
If Gold DOES break through $US 330 and signal a new leg of its bull market to those in the know, then EVERYTHING is at risk. Gold stocks would surge, further accentuating the differnence between them and all other sectors of the stock market. The Dollar, as the lynch pin of the global fiat currency system, would be seen as being under intense pressure and would likely fall against other currencies as it was falling against Gold. Uneasiness and uncertainty about a "double dip" recession in the U.S. would be quickly transformed into fear and panic.
If Gold surges, the Dollar will fall. If Gold surges, stock markets will fall. If Gold surges, a "risk premium" element will be inexorably built into interest rates and they will rise. If Gold surges, the jig is up. That is why Gold is NOT surging. Not yet. It will be fascinating to see how long this entire situation can be kept "on the brink". Stay tuned.