Please cast your mind back to early December last year. If you need an assist, here is the Gold Commentary we wrote on December 6, 2002. It was titled: "On The Brink Again". Well, eight months later, here we are "on the brink yet again".
Keep our December 6, 2002 commentary open while you read on - it will open in a seperate browser window when you click the link. Were going to do exactly the same thing in the lead in to this article as we did in that article back on December 6, 2002:
The five highest spot future Gold closing prices for 2003 - so far - are as follows:
The five highest spot future Gold intraday highs for 2003 - so far - are as follows:
In early December 2002, Gold was right on the verge of finally surmounting highs it had set six months earlier, in early June 2002. In August 2003, Gold is right on the verge of surmounting highs it had set six months earlier, in February 2003. The resemblance of the Gold price situation then and now is that close.
Of course, during the week after we wrote that December 6 Gold Commentary, Gold did break above its highs of six months earlier on the way to the new peaks it set in early February 2003 - see above.
This does NOT mean that Gold is going to do the same thing next week, the shortened trading week (in the US) of September 2 - 5. It may, or it might take another 2-3-4-? weeks to get there. All we know with certainty right now is that spot future Gold closed on Friday, August 29 $US 3.20 below its 2003 high closing price and reached an intraday high $US 6.00 below its 2003 intraday high.
In December 2002, two of the market bubbles in the US - the stock market bubble and the $US bubble, had already burst. But two further US bubbles - the real estate bubble and the Treasury bond bubble - were still going strong. The Treasury bond bubble burst in June 2003. The US real estate bubble is in the process of bursting now. Mortgage refinancing has already plummeted. There was a surge in new mortgage applications in early July when Treasury yeilds started to rocket higher, but that has now subsided. More recently, there has been a surge in variable rate mortgages as opposed to the traditional US fixed rate mortgates as new buyers desperately seek lower rates. That is now also starting to falter.
In December 2002, the main engine of US economic "growth" continued to be consumer borrowing and spending, most easily seen in the housing boom and in borrowing for new cars. Now, with market rates having risen for the past two months, all these avenues are being choked off. The US second quarter GDP figure was just revised - upward - to 3.1%. ALL of this upward revision, and the vast majority of the "growth" in the original figure, was blandly admitted to come from one source only - GOVERNMENT BORROWING - specifically government borrowing for MILITARY purposes.
There is absolutely no shred of doubt about it. The MAJOR "source" of US economic activity now is government borrowing, or to put it another way, government "deficit spending". Economically, this is of course a guaranteed recipe for disaster, as it has ALWAYS been in the past wherever and whenever it was tried. History lists no exceptions to this rule.
Here is a link to a story in the New York Post which appeared on August 29. We quote: "Investors may want to send the Department of Defense a giant thank-you card. That's because government spending jumped an eye-popping 45.9 percent in the second quarter of the year. ...'This is the engine for our economic growth,' said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. 'It's going to be a boon for the stock market.'"
Disney really should move the location of their "Fantasyland" from California to Wall Street. As you can see in the article, Wall Street is salivating over all the money that will have to be spent to replenish all the ordinance that the US blew off in Iraq in March. How that is supposed to "grow" a REAL economy is left to the realms of the unstated. Suffice it to say here that it is the latest example of what Bastiat identified more than 150 years ago as the "broken window" fallacy.
Replacing broken windows, or houses smashed by a hurricane, or bombs detonated over Bahgdad, adds NOTHING to an economy. What it does is to divert resources which could have added new wealth to the economy had they not been needed to replace goods that had already been destroyed, either by accident or on purpose. This is economics 001, so obvious that nobody but a modern economist would ignore it.
In December 2002, when Gold was trembling on the brink of a new upleg in the bull market which had begun way back in April 2001, the REAL situation was still masked by the as yet unquenched borrowing appetites of the US consumer. Now, that appetite has been sated, or to put it more crudely ,the consumer has had a tummy staple in the form of higher market interest rates. To this point, the US government is trying to fill the breach by borrowing what the US private sector cannot borrow any longer. This, as already stated, is a guaranteed recipe for disaster.
So, here we are, with Gold on the brink again, with another upleg on Gold having already been signalled by a new upleg on Gold stocks (that had NOT happened in December 2002), and with the economic situation seen to be worse (despite the ocean of propaganda pablum coming out of Wall St and Washington) than it was in December 2002. It is merely a matter of time. We don't know how much, but just as we were in December 2002 - and for MANY years before that - we are quite content to watch, and wait.