Before we begin, here are the seven best annual performances for Gold since President Nixon closed the "Gold Window" in August 1971. The 1971 performance is also shown for comparison purposes.
December 31 - Year-end 2002
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And here also is the monthly Gold bar chart (based on spot future CLOSING prices)
(Chart appears here in original commentary)
Finally, here is a quote from the last Gold Commentary of 2002:
"The major difference between the situation now and the one in the late 1970s is that now, almost no-one is familiar with the debate over the nature of money, and most still take it for granted that there is no danger to the economic and financial system no matter how much "money" is produced out of thin air."
(Gold Commentary - December 27, 2002)
2003 will be the year when that comfortable complacency, which has been the rule inside the US for more than two decades, is rudely shattered.
Are you sitting comfortably? Fine. Now, consider two facts.
On Tuesday, December 31, the US Treasury posted its "debt to the penny at $US 6,405.7 Billion. It just so happens that the US debt ceiling, signed into law by President Bush exactly six months previously, is $US 6,400 Billion!
Next week, President Bush will unveil to the breathless world an "economic stimulus" package for the US economy. Few if any details of this "package" are known, but it is widely rumoured to include tax cuts of $US 300 Billion spread over the next ten years.
Put these two facts together (there are many others, but these will do all by themselves), and you are staring straight at a US Administration which has taken leave of whatever remained of their senses. Consider the fact that six months ago, Mr Bush signed into law a $US 450 Billion increase in the US debt ceiling. That $US 450 Billion is now all used up, according to the Treasury. Oh, by the way, the Treasury had their official "debt to the penny" back under "control" on Jan 2, 2003, when it was reported at $US 6,389 Billion. Having borrowed $US 450 Billion in six months, the Bush Administration now proposes to CUT taxes! Surely, even the tooth fairy would blanch at such a prospect.
The simple fact is that, as we enter 2003, the US Administration has totally and utterly lost the plot. They have not yet begun to fight, in Iraq, that is. The Treasury has run up $US 450 Billion in new debt in six months. The Fed is adding to the money supply at 20% plus annualised rates. And now they propose to lower their revenue by means of tax cuts. Question: How can the Dollar hold up under this onslaught? Answer: It can't!
And yet ... On the first trading day of 2003, the $US index staged a big rally. From its multi-year low of 102.26 set on December 31, the $US index soared 1.21 points to 103.47. The catalyst was almost certainly Japanese intervention in the currency markets. On Friday, January 3, the $US index gave almost exactly half of that back, and Gold soared $US 5.60 to close above $US 350 (at $US 351.60) for the first time since May 1997.
Given the fact that US financial and economic policy has entered the realm of the insane, this Gold poke above $US 350 should be just the start. Encouragingly, Silver, which lagged Gold badly throughout 2002, has also broken loose. On January 3, it closed up $0.08 to $US 4.90, its highest spot future close since July 2002.
The US Administration is seemingly of the firm "opinion" that they can print and borrow their way out of any corner, no matter how tight. They seemingly propose to operate in this manner despite the fact that EVERYONE who holds US Dollars will be sorely tempted to start getting rid of them. The attitude is: "They wouldn't DARE!"
Historically, "they always do". There comes a point where the risk of holding a depreciating currency, regardless of the power of the political entity which issues it, is greater and SEEN to be greater than the risk of getting rid of it. US financial policy as revealed so far makes this point imminent. If the US Administration and the Fed don't back off soon, as they did at the end of the 1970s when they let interest rates free to find their own level, the Dollar will plummet - and Gold will soar. Welcome to 2003 - it's going to be one HELL of a year.