"Between June 11 and June 25, Gold recorded a significant rise in $US terms and, more important, Gold rose in terms of EVERY major global currency." (See Gold This Week - June 25)
That streak was broken last week - June 28 - July 2 - with Gold's $US 8.50 fall on June 29. Of course, it was merely a coincidence that June 29 was the first day of the two-day FOMC meeting and the day before the Fed made the most telegraphed interest rate hike in their history. This week, however, Gold has resumed its advance, not just in terms of US Dollars, but in terms of EVERY major global currency. As we said in the headline, three out of four aint' bad.
The spot future close of $US 408.20 on July 8 was the highest since April 19. It improved all the Gold charts no end and put the metal back comfortably above its 200-day moving average. It was also the second day of a two day "tear" which saw Gold rise by $US 15.20 or 3.9% while the $US index was falling a mere 0.59 points or 0.7%.
A "reason" for this untoward performance by Gold had to be found, and it was. The rise was blamed on the pressure being put on the bankers of the giant Russian oil company Yukos. Yokos and the Russian government have locked horns over a matter of tax evasion and the bank has become the meat in the sandwich. So have several other Russian banks who are being hit by depositors withdrawing funds as rumours spread that the Russian government has a "hit list" of banks which they "suspect" of laundering money, aiding in tax evasion, and other unsavory practices.
The Russian Central Bank has now tried to step into the breach by halving the reserve requirements of banks and assuring all and sundry that the banks are "solvent".
This banking mess in Russia is being used to invoke memories of 1998, when the Russian government reneged on its sovereign debt. In reality, it has more in common with the US Savings and Loan crisis of the late 1980s. Suffice it to say that it is NOT the reason why Gold has all of a sudden shot higher over the past week.
To get to the REAL reason why Gold is going up again, here's a recent quote from Mr Thomas Hoenig, president of the Federal Reserve Bank of Kansas City: "Inflation is present and it should be watched. If inflation becomes a part of the economy, we know the pain that can come with trying to bring it back out."
Sigh. In the press release which accompained the FOMC's decision to raise the Funds Rate by 0.25% on June 30, they had this to say about "inflation": "Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors"
Transitory factors?? Like two walloping credit expansions over a decade, the first of which blew up the stock market bubble and the second of which was put in place to offset the effects of it bursting? Like levels of government spending and budget deficits which would be right at home in any banana republic? Like world record trade deficits? Right - THOSE "transitory factors".
Of course, what the FOMC and Mr Hoenig are talking about is not really inflation at all, it is rising prices. OK, we'll bite. What "transitory factors" are now affecting US prices? Well, there are all of those mentioned in the preceding paragraph for a start - the ones which have been pumping new Dollars into the system for a decade or so. Then there is the fact that the US Dollar is now on the way down again in what will probably prove to be the next leg in its post January 2002 bear market.
A year or so ago, the Fed was telling us that "deflation" is here. Now, they are telling us that "inflation" is here. Both invocations were in the context of prices, and prices which have the temerity to move are not in keeping with the Fed's "obligation to maintain price stability"
Perhaps it is time to introduce the Fed and its governors to a simple concept, that of a "market". A market is a place where people come together to exchange economic goods. The sellers want the highest prices they can get. The buyers want the lowest prices they can pay. Somewhere around the middle of this range, an exchange takes place using a medium of exchange (commonly called "money") and presto, we have a price. Multiply this process by the billion and we have a market economy.
What is needed for this market economy to grow and prosper is NOT "stable prices". In a market economy, stable prices are impossible. What is needed is stable MONEY. If what a unit of money IS is fixed (x Dollars = one ounce of Gold, for example) then what a unit of money BUYS will, over time, increase. This is so for a number of reasons:
The Fed was set up in 1913 for the express purpose of providing an "elastic money able to meet the needs of business". It has pursued that goal with unceasing zeal ever since, with the result that the money has been stretched literally to the breaking point. In the process, rational economics has been turned on its head.
We stress again, what is needed is not stable "prices" (an impossiblity in any case). WHAT IS NEEDED IS STABLE MONEY. Money is the common DENOMINATOR in any exchange - the ONLY thing which, if it is valid money, does NOT change. As Sir Isaac Newton said when he was made master of the British Mint in 1717: "Gentlemen, in order to calculate - YOU MUST DEFINE YOUR UNIT."
Today, the financial world never stops "calculating" but they have no fixed unit. The last tenuous connection between Gold and what is used as money was severed almost 33 years ago. Since then, economic calculation has exactly matched the famous old computer saying "GIGO" - Garbage In - Garbage Out.
For the third week out of the past four, Gold has moved up against ALL world currencies. In $US terms, it is at its highest level in nearly three months. The reason for this is very simple indeed. The world's monetary system has been fatally flawed for a third of a century. After spending most of that time bouncing around the "periphery", with countless financial "crises" occurring with increasing regularity all over the world, that fatal flaw is now being exposed in the centre, in the home of the world's reserve currency, the US Dollar.
Yes, the "vested interests" all over the world trying to keep the modern fiat money system functioning are vast. So, on a proportional level, were the vested interests trying to keep the diluted Roman, or Spanish, or French, or British, or German currency system functioning. Those systems failed because by their nature, they could do nothing else.
The system we are presently "lumbered" with is no different in principle, only in size. As it is presently constituted, it will inevitably fail. Money is much too important an item to leave at the mercy of either politicians or bankers, Central or otherwise. Until that lesson is relearned, Gold will not be "stable" in terms of Dollars or any other paper money. It will continue to rise, and Rise, and RISE.