It ended up being a pretty quiet week, at least as far as the Gold price is concerned. After spending most of the week bouncing off the $US 385 level in intraday trading, spot future Gold staged a bit of a rally on Friday, moving up $US 4.00 to close the week at $US 391.00. In fact, $US Gold was actually up for the week, albeit by a mere $US 0.50.
But while the Gold price didn't do a whole lot, the volume on the Comex market was huge, averaging nearly 120,000 contracts a day until Friday, July 30. Take a look at the open interest on the chart above. You can see that it peaked just before the recent Gold price swoon and has now been washed out once again.
Now, here's a quote from a story about the Dollar's trading on Friday, July 30 from the International Herald Tribune: "'The dollar is still trading on Greenspan's credibility - that is, on his assertion that the soft data is temporary and the economy remains strong,' said Seth Toney, head of foreign exchange at Dresdner Kleinwort Wasserstein."
The "soft data" was, of course, the lower than expected US economic "growth" figure of 3.0% for the second quarter of 2004 announced on July 30. "Street" expectations had been for a figure of 3.7%. The most ominous part of the data was a report that consumer spending slowed to a 1.0% "growth" rate in the second quarter, less than 25% of the 4.1% reported for the first quarter.
Now here's the amusing part. It is of course true that Mr Greenspan knew all about the "soft" data to be released on July 30 when he gave his two days of testimony to Congress last week. It is equally true that he knows that his credibility rests on the resumption of more "robust" data in the third quarter, the quarter which is already one month old. The point is that ALL this data comes either directly from US government departments, or from the Fed, or from so called "independent" sources who know all too well which side of the bread the butter is on.
It does not take a long memory to recall what happens to economic "data" which is too far out of line with the message that the monetary authorities want to convey. Remember the repeatedly "postponed" PPI data? Contemplate measuring "price inflation" through the CPI without reference to either energy or food prices. There are many other examples, but you get the picture.
Most of the world in general, and Wall Street in particular, "measures" the health of the US economy almost solely on the basis of the great stream of economic data which daily flows over them. Nearly all of this data is either directly produced by government or it is produced by organizations which are at constant risk of having the full weight of government "disapproval" descend on them from a great height if they go outside their "guidelines". The credibility of anyone, in any walk of life, would undoubtedly be greatly enhanced if the measurement of their efforts was in their own hands. For example, how many bad credit ratings would there be if everyone had the ability to put out their own "data" about their borrowing position? The very idea would be deservedly laughed out of court. Yet that is precisely the position enjoyed by modern governments, and their Central Banks.
And so, according to the quote above, the currency markets are betting that Mr Greenspan's rosy outlook for the US economy for the second half of 2004 will be confirmed by the "data". There will certainly be a concerted effort along those lines, regardless of the REAL state of the US economy, if the Fed and the various government departments in Washington have anything to do with it - AND THEY DO!
As we pointed out in the current issue of The Privateer (#506 - The Late July issue published on July 25), everyone in the US would love to be living in the kind of robust economy described by Mr Greenspan in his Congresional testimony. The problem is that they don't - and more and more of them know that they don't. No amount of economic "data", no matter what formulaic magic is used to produce it, can disguise that fact.
And so, the strain continues to grow. Oil hit 21 year highs on Friday in $US terms. US stock markets are hanging in there - just - with the Dow having got back above the 10000 level. The Dollar is still moving upward on a bet that the "data" will prove favorable, without a thought about whether it will be so out of kilter with what anyone can see out of their eyes that it will simply not be believed. And Gold is not doing much of anything price wise while it trades up a paper storm on a daily basis.
This week, Kerry and Edwards were duly anointed as the Democrats Tweedledum. Ex Clinton Treasury Secretary Robert Rubin, now a "top economic advisor" to Kerry, has announced that Kerry will not announce his financial plans for the US until and unless he is elected in November. That will be a good trick, if he can pull it off. Obviously, neither Mr Rubin nor Mr Kerry think that Americans need to know WHAT they are voting for, just who they are voting for.
Next Thursday, August 5, the European Central Bank (ECB) meets and announces their decision on official European interest rates. European consumer price rises (at 2.4%) have remained above the ECB's 2.0% "limit" throughout July. Already, politicians and financial analysts in Europe are coming up with all kinds of "reasons" why the ECB should NOT raise rates. We'll see.
And, of course, on August 10 the FOMC meets with everyone expecting another 0.25% rate rise for the US. Don't forget, the "official" reason why official US rates are now being bumped higher is because of the "robust" economic growth which the US is now enjoying. On paper, that "growth" will no doubt continue. In reality? We don't think so.
Here's a good one.
For the occasion of Sri Lanka's "Golden Jubilee" (50 years) of independence celebrated in February 1998, the Central Bank began to sell commemorative Gold coins weighing 8 grams or 0.2572 Troy ounces. At the time, with Gold selling for between $US 290-300 per troy ounce, the 8000 rupee (1000 rupees per gram) gave a healthy 3000 rupee (37.5%) profit to the Central Bank for each coin sold.
"Sadly", that is no longer the case. On July 29, the Sri Lankan Central Bank announced that it was suspending sales of the coins, for reasons which will become obvious:
To restore the 37.5% profit that the Sri Lankan Central Bank was enjoying when the coins were first offered for sale in February 1998, the price of the coins will have to be raised from 8,000 Rupees to 14,340 Rupees. Now that's "inflation" for you, a price rise of 79.25%.
This is also an example of the end result of "price stability", that Federal Reserve holy grail which Mr Greenspan keeps alluding to. In a world of fiat currencies, two of which are the Sri Lankan Rupee and the US Dollar, "stable prices" tend to become VERY unstable VERY quickly when the strain of keeping them stable proves too much to bear.