In early morning trading on the Comex on Friday, February 13, four events occurred. Gold was set in London on the PM fix at $US 416.00, a rise of $US 4.40 on the previous day. The December US trade deficit and the deficit for the year of 2003 was announced. The December deficit was $US 42.5 Billion - up 11% from November. The 2003 deficit was $US 489.4 Billion - a 17% increase over the previous annual record which was set in 2002. On top of that, US consumer confidence in (early) February was reported to have fallen by 10 points or nearly 10%. And finally, and most ominous of all, the US Labor Department reported that US import prices had risen by 1.3% in January. That was triple Wall Street "estimates" of 0.4%.
As could have been expected, the $US index, which had touched a new 2004 closing low of 85.36 on February 11, plunged below the 85 level in early trading and the Euro rose within a whisker of its 2004 highs.
Then came the turnaround. The $US index recovered to close with a (small) gain on the day while spot future Gold plunged from intraday highs of $US 416 to $US 408 before recovering to close down $US 3.40 at $US 410.30.
Given the one-two-three (trade deficit, consumer confidence, import prices) punch which hit early in the day, this big US Dollar turnaround looks close to miraculous. That is, until one notices that after all the bad news was out, the Euro suddenly fell more than one US cent as a "big European bank" sold 2 Billion Euros for $US. This had a disproportionate effect on the $US index, for the very simple reason that the weighting of the Euro in the $US index is more than half - 57.6% to be precise.
And, of course, this big sale of Euros for Dollars instantly sparked rumours that the ECB (European Central Bank) was (finally) intervening in the currency markets. After trading had closed for the day, traders were reportedly unable to confirm whether the ECB had actually been active in the markets.
All that is known for sure is that a (big) European bank chose to dump 2 Billion Euros on the market in exchange for US Dollars, just as the US Dollar was on the verge of accelerating downwards and shortly after a raft of economic statistics had (to put it VERY politely) called into serious question the "upbeat" forecast for the US economy given by Alan Greenspan in testimony to the US Congress.
Mr Greenspan had told the Congress that US economic growth was solid and would continue. He implied that the Fed's "patience" in holding official rates at their present 46 year lows of 1.00% was solid, and that a lower Dollar was not a problem because it would ease the trade deficit as US exports became more competitive.
Economic growth is solid? "Insiders" (CEOs and others high on the corporate tree) don't think so. They have been selling into the stock market rally almost from the day it began last March. A lower Dollar will ease the trade deficit? Well, the Dollar fell in 2002 and the trade deficit set a record. The Dollar fell further in 2003 and the trade deficit set another record, 17% higher than the one in 2002. What Mr Greenspan did not mention was that by far the biggest "export" from the US to the rest of the world is - US Dollars.
This week, right up until the "European Bank" sold Euros for Dollars in mid session on February 13, the Dollar had been weakening and Gold strengthening. Treasurer Strong spent the week telling everyone that plans were in place to halve the budget deficit over the next five years. Mr Greenspan told Congress that everything was peachy. Then, on Friday, the numbers came out. And right after that, the markets turned on the proverbial "dime" as at least one European bank DID sell Euros for Dollars.
"Something" had to be done, the Dollar was on the verge of plunging far enough below its previous 2004 lows to signal yet another down leg in its bear market. In the current issue of The Privateer (#494 - published on February 8), we had this to say in our "What's Next" section:
"The possibility exists that the Europeans may be pressured or otherwise coerced into lowering their rates, thereby giving the US Dollar some breathing space. The problem here is that the Europeans are likely to demand that the US take concrete steps - higher rates, lower deficits - to address the problem before they act in such a manner."
"the other possibility is that in extremis, there could be a joint currency intervention in the currency markets by any combination of the Fed, the Bank of Japan, and the European Central Bank"
There is no doubt whatsoever that the situation was approaching "extremis" in the morning of February 13 when the dire economic numbers from the US came out and the Dollar dived below all previous support levels on the $US index. There is equal lack of doubt that it was rescued. The Japanese didn't do it, they have been intervening for more than a year. This time, it was a "European bank" buying Dollars for Euros according to all reports we have seen.
We don't know whether this was (surrogate) ECB intervention or some bank fulfilling an order for Dollars made by a client or simply "profit taking". We do know that it rescued the Dollar at a very opportune time indeed - right after a raft of horrendous US economic statistics and right before a long weekend in the US - Monday, February 16 is "President's Day".
Whatever happens, it was the rumours of ECB intervention which allowed the Dollar to hold onto the rebound it made when the European bank stepped in until the close of trading for the week. It was also that rumour that pared Gold's gain on the week by nearly $US 6.00 in the last few hours of trading on February 13. The message from the US is that the government won't cut its deficits this year - there's an election coming. And the Fed won't raise rates - there's an election coming. The problem is that the election doesn't happen until nine months from now.
For the last month, the Dollar has been propped up and Gold held down on rumours that the Europeans might be coming to the party to aid Japan to prop up the Dollar. Now, the rumours are that the Europeans HAVE come to the party. Whether it is true or not, the fact remains that intervention by BOTH the other "big two" - the Bank of Japan AND the ECB - IS now deemed necessary to halt the Dollar's slide, no matter how temporarily. The further assumption is that neither the Fed nor the Treasury can help - not this year - THERE'S AN ELECTION COMING.
Can this situation be maintained for the next nine months, right up until the US election in early November? We don't think so. Just to give you one picture of how bent out of shape the "normal" situation in the markets already is, consider these two charts:
This is a chart of the performance of Gold in several selected currencies so far in 2004.
And this is a chart of the performance of Silver in those same currencies so far in 2004.
As you can see, Silver is up 10.23% in $US terms so far in 2004 while Gold is DOWN 1.39% in $US terms over the same period. We'll save you the trouble of doing the calculation. If the Gold rise thus far in 2004 had equalled the Silver rise in percentage terms, the spot future Gold price in $US terms would now be $US 458.70 - instead of $US 410.30.