The one thing, above all others, that could shake that faith, and therefore the foundations of the modern financial system itself, is a rise (especially a sharp rise) in the U.S. Dollar price of Gold.
(From the Introduction to Gold This Week)
As a young man travelling in Africa, I got a crash course in "mechanics", courtesy of the very old and temperamental vehicle we were travelling in. I remember especially hitting a huge pothole in Zaire and smashing both the front springs into small pieces, thereby totalling the front suspension.
There being no mechanics in 100 miles in any direction, and no exact replacement for the springs in probably 1000 miles, we were reduced to finding any springs we could and "adjusting" them to fit. We were lucky enough to find springs which looked like they would serve the purpose on an old wreck we found in a nearby town, but we were then faced with the prospect of having to compress them to fit our vehicle. Of course, we had none of the tools usually deemed essential for such a job.
After a day of sweating, swearing, risking life and limb, and contriving ever more fantastic methods - my travelling companions were a pretty resourceful lot - we managed it. The springs were too long and much stronger than the ones they replaced, so getting them to fit was NO picnic. The van rode like a brick, but it steered and the brakes worked. To this day, I treat springs with respect. If you ever lose control and they let go, make sure that no item of your anatomy is anywhere near them.
Right now, I think the analogy is quite apt. Gold (and Silver) have been "compressed" by means of the same sweat, swearing, and contriving of ever more fantastic methods. If you doubt it, consider this table:
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The percentage changes in this table measure the move in both $US Gold and the $US index from the previous date in the table. For example, between February 4 and September 24, $US Gold rose 2.24% while the $US Index fell 5.26%. Please note however since Gold hit its early 2003 highs in February, it has been "underperforming" the $US Index. By this we mean that the rise in the $US Gold price has been less than the fall in the $US index. This is especially acute since Gold hit its recent 2003 high of $US 387.50 on September 24. Since then, BOTH the $US Gold price and the $US index have fallen.
As you can see from the last entry on the table, the increase in the $US Gold price is now significantly less than the fall in the $US index for the year to date. Had the $US Gold price perfectly reflected in the fall in the $US index since January 1, 2003, Gold would now be 10.24% above its January 1 close of $US 348.20. This would put it at $US 383.90.
In the time it took Gold to regain and then slightly surpass the levels it had reached in February, the $US index fell more than 5%. Since then, the $US index has fallen further, and so has the $US price of Gold. This is Gold "compression" with a vengeance.
This is "fine" as long as it works. The problem with compressing a spring, though, is that the harder you compress it, the bigger the devastation when the restraint is no longer strong enough and the spring extends back to its "full" size. That is what is now being risked in the Gold markets
Why is it being risked? We simply refer you back to the quote which starts this commentary. The GIGANTIC and ever growing total of $US debt is common knowledge, one can hardly avoid it. The inexorably weakening US Dollar is also common knowledge. The ever present threat of foreign sales of US debt instruments is analysed almost daily. Now, there are even suggestions that Russia might consider pricing its Oil in Euros instead of Dollars, undermining a major reason why foreigners hold Dollars. All this is happening. Market participants around the world are watching it happen. Still, as yet, no obvious cracks have developed on the markets or within the global financial system itself.
We are living in a surreal financial situation, an accident waiting to happen. Every major stock market is up this year, the vast majority in double figures percentage wise. The more a nation is dependent on the US as an export market for its economic well being, the more its stock market is up. In the US, interest rates have been all but eliminated and when that didn't work, the federal government has ramped up their borrowing to levels never before approached. All this in an effort to rekindle "growth". The tragic joke of the situation is that the only "growth" that is being measured is a growth in "money", not a growth in wealth.
For an isolated individual, living beyond his or her means is not an option. Robinson Crusoe could not consume what he had not first produced. In a society, one can live within one's means, or one can acquire the means of others. There are three ways to do this. One can trade, one can deceive others into giving up their means, or one can plain steal. One can live by effort, or fraud, or force.
Today, we live in a world of financial fraud. The most tragic part of this situation is that everyone, including countless millions of honest men and women who offer an honest effort in return for their reward, are at the mercy of those fraudsters who produce the means of payment out of thin air and then force their fellows to "accept" it in return for their honest effort. The present situation has moved beyond mere economic imbalances. It has entered the realm of the BIG con.
Right now, the biggest and most obvious con is the $US Gold "price". The worse the actual economic situation has become this year, the more Gold has been "compressed". Since Gold reached its 2003 highs just over two weeks ago, this "compression" has reached the danger level - dangerous for those doing the "compressing", that is. Springs always snap back. That is the certain future for the $US Gold "price". The tighter the spring is coiled and the longer it stays compressed, the more powerful the snap back will be.