By now you probably know what happened to Gold in Comex trading on Friday, February 20 - down almost $US 16.00 at one point before the spot future price closed down $US 12.30 at $US 397.50. That close is exactly $US 0.60 below spot future Gold's previous 2004 low close of $US 398.10 set on February 5.
Here's one of many headlines - this one from Reuters:
"Japan Ups Security Against Possible Terrorist Attack"
Here's the gist of the story:
"Japan tightened security Friday at 650 vital facilities across the country, including nuclear power plants, government offices and U.S. facilities, to guard against a possible terrorist attack, a National Police Agency official said."
"The official said the heightened alert was due to such factors as Japan's recent dispatch of a contingent of ground forces to help rebuild Iraq."
"He declined to say whether there had been any new information concerning a possible attack."
The Japanese have indeed learned from watching the adventures of the Bush Administration in the US. Why bother with having "reasons" for invoking a terrorist alert? The Bush Administration has been having rolling terrorist alerts ever since 9/11. They have also trotted out all kinds of "reasons" for their "response to terrorism" and their war in Iraq. These were all bogus at the time and have been thoroughly discredited since. Why risk putting oneself in the same position by citing "reasons" for a terrorist alert? Why not just have one and "see what happens"?
Thus, the Japanese Police Agency official said that the alert was because of Japan's dispatch of troops to Iraq. The Japanese government passed a special law way back in July 2003 which did an end run around the Japanese Constitution (written for them by General MacArthur when he was the Japanese head of government post WWII) and allowed the government to send troops to Iraq. There were big protests against this decision in Tokyo and elsewhere on January 25. And the first contingent of troops left for Iraq on February 3 - more than two weeks ago. Why NOW - for the sudden and very public burst of "tightened security"?
Let us see if we can think of some of the REAL reasons:
In the MONTH of January 2004, Japan spent the equivalent of $US 72 Billion selling Yen and buying Dollars. This was 40% of the amount they had spent in the currency markets over the entire YEAR of 2003. The Bank of Japan and the Japanese government looked ahead to the period between now and the US elections in November, knowing that the US would do nothing (like raise interest rates and/or cut deficit spending) to aid in propping up the Dollar until the elections. The Japanese realised that they couldn't keep it up until November. Their suspicion that Europe was not going to help also firmed to a near certainty. Something had to be done.
A month of ever higher level global financial meetings stretched between the G-10 meeting over the weekend of January 10-11 and the G-7 meeting over the weekend of February 6-7. With each meeting, the "rumours" and the jawboning all designed to support the US Dollar (and push the $US Gold price down) intensified. The $US index set an intraday 2004 low of 85.10 on January 10 - two days after the end of the G-10 meeting. It set a new 2004 intraday low of 84.85 on February 13 - a week after the end of the G-7 meeting. It then went on to set another 2004 intraday low of 84.77 on February 18.
Thus, a whole month of global "jawboning" all designed to try to prop up the US Dollar had come to nothing. Something much more potentially dangerous than a plummeting Dollar was at risk. What was at risk was the credibility of the entire Global financial system. All the soothing noises, rumours of European intervention, rumours of the Chinese allowing their currency to float, Fed assurances of their "patience" when dealing with US interest rates, and pious platitudes from the G-7 about the desirability of "stable and flexible" currencies was unravelling.
Gross intervention in the currency markets, rumour mongering, and the spreading of transparently flawed economic and financial platitudes was no longer enough. The Japanese played the ultimate (in today's world) card - the TERROR ALERT!
It worked. The US Dollar soared against ALL major currencies, but especially the Yen. Gold plummeted back below $US 400, having closed at $US 416 only three days previously.
Last week, a European bank was seen selling 2 Billion Euros for US Dollars. That prompted instant rumours that the European Central Bank had finally climbed off the fence and was helping out the Bank of Japan to prop up the Dollar by intervening. That didn't work, there was no follow up this week and the $US index fell to new 2004 lows. We've got the troops in Iraq, reasoned Japan, it's time for a terror alert. That'll fix all those Dollar shorts. It did. It "fixed" quite a few Gold longs too.
This is desperation of a palpable nature. Here's another example. On Friday, February 20 the US CPI for January was announced - up 0.5% after December's 0.2%. Ben Bernanke chose this event to boast about the Fed's success over decades of fostering "price stability". As I read this, I was reminded of a post I saw on a chat group from someone in California bewailing the fact that he had just seen his local gas station raise the price of a gallon of gas by 20 cents (or nearly 12%) to $US 1.90. I was also reminded of a very pithy comment I saw on the net - and this is a paraphrase - Washington (DC) has finally become a bilingual city. Truth is the second language, and it's not used very often.
So, we have a "terror alert" in Japan, no doubt accompanied by a little intervention for leavening purposes, and the Dollar shorts and Gold longs all rush headlong for the exits. Gold falls below $US 400 again and the $US index rebounds from 2004 lows again. Have you noticed, by the way, that each successive major $US Index low so far this year has been accompanied by a lower $US Gold price than the one before?
We are watching the equivalent of a nuclear war in the finance and currency arena being fought by the monetary powers that be (primarily but by no means exclusively the US powers that be) to preserve, protect, and defend the post World War II international financial system and its (you should pardon the expression) lynchpin, the US Dollar.
And all this is happening in what are still the very early stages of a US Presidential election year, long before the opposition candidate is finalised (although Senator Kerry seems to be anointed already) and more than eight months before the votes are cast. For the rest of the world to keep the global financial system on a more or less even keel in the absence of any assistance from the US - which does NOT want to let on that anything is amiss - would be a feat of economic ledgerdemain of a nature which has seldom been attempted and NEVER pulled off in history.
It will, however, be highly entertaining and quite likely astonishing to watch them try. The "ante" has just been upped one more level. Let's see how long this one "works".