At the beginning of 2004, spot future Gold stood at $US 416.10. On August 20, it closed up $US 6.10 to $US 413.20. This is the closest Gold has got to being back in the "black" for the year since the last time it WAS in the black for the year - on April 12 - more than four months ago.
This week, the spot future Gold price rose by $US 14.30, lifting from $US 398.90 to $US 413.20. It thereby halved the distance to its 2004 high - a spot future close of $US 427.80 set on April 1.
Like we said: "Almost Back To The Start - Halfway Back To The Highs."
The biggest Gold move this week, just as it was last week and the week before that, came on the Friday. But THIS Friday, the oil price was not up, it was down. The $US index was not down, it was up. US stock markets were not challenging 2004 lows, the Dow rose on the day and is back above the 10000 level. Most important, this Friday (August 20), in contrast to the past three Fridays, there was no horrendous US economic statistic which proved to be wildly at variance with market "expectations". There was no anaemic US economic "growth" figure as there was on July 30. There was no shocking report of new job creation as there was on August 6. And there was no record trade deficit figure as there was on August 13. This Friday, Gold simply "went up", and not only that, it went up in terms of ALL major paper currencies, not just the US Dollar.
If you listen to the "mainstream" commentators, this is all because of the "insurgents" in Iraq which have in turn caused the oil price to skyrocket which has in turn lured "some" people to look for alternatives to the US Dollar. The implications are, as usual, clear. This is all "temporary". All that is necessary is to get the "insurgents" under control and everything will be rosy again, just like Mr Greenspan told us they would be a month ago.
But even more indicative of the true situation than this mainstream analysis are the utterances of the US financial "powers that be" who are again in chorus telling us about all the things that have absolutely nothing to do with the present situation. Mr Greenspan's Congressional testimony in mid-July remains as "exhibit A" in this category, but it is not alone.
Take the press releases which accompanied the last two FOMC meetings (on June 30 and August 10). Of course, the Fed Funds rate was raised by 0.25% at both these meetings. With the exception of a sentence in the second paragraph, these two press releases were identical. Here's a comparison which shows how the sentence was altered:
June 30:
"The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid pace and labor market conditions have improved.
August 10 - after a gigantic volume of data contradicting the June 30 statement:
"In recent months, output growth has moderated and the pace of improvement in labor market conditions has slowed. This softness likely owes importantly to the substantial rise in energy prices. The economy nevertheless appears poised to resume a stronger pace of expansion going forward."
According to the FOMC on June 30, everything was splendid with solid economic growth and lots of jobs being created. That facade continued unbreached through Mr Greenspan's Congressional testimony on July 21-22. But then came the numbers outlined above, the growth, employment, and trade deficit figures. By the time the FOMC got together again, they knew they had to give at least some lip service to the concerns raised by the data. Hence the changes in the August 10 press release.
Here we go again. Why are output growth and labor market conditions not quite as wonderful as we thought they were back in June? Because of the substantial rise in energy prices, of course. And why have energy prices risen substantially? Because of the pesky rascals in Iraq. Doesn't it have anything to do with rampant credit creation, "open market operations" injecting cash into the system by the Fed, or out of control budget deficits? Definitely NOT!
True, the Fed press release on August 10 didn't actually mention any of these things, it simply ruled them out by confining its explanation of the "slowdown" to rising energy prices and NOTHING BUT rising energy prices. Since then, however, the chorus has upped the volume, this time led by US Treasury Secretary John Snow.
For more than a month, Mr Snow has been asking Congress, with increasing regularity and growing vehemence, to raise the Treasury's debt ceiling. Of course, the Congress can't do it now. They are in "recess" and don't reconvene until September. This is the hilarious process by which the US government gives itself "permission" to borrow more money so that they can go on servicing the debt on the money they have already borrowed in order to maintain US Treasury debt paper as a global financial "asset" and not a huge pile of richly engraved wallpaper.
Mr Snow has maintained that the Treasury will run out of room by mid/late September (that's a month from now) and will only be able to continue to function thanks to all the accounting tricks invented by his predecessors until mid November - at the latest. Of course, mid November is AFTER the Presidential elections.
But Mr Snow has not confined himself to musing on the debt ceiling. At a press conference last Friday (August 13), he reacted to the announcement of the record US trade deficit of $US 55.8 Billion for June by urging faster economic "growth" on Europe and Japan. We covered Mr Snow's amazing utterances in this context last week.
This week, Mr Snow went one better, while speaking on a radio station at the Iowa State Fair. When asked about the high foreign ownership of US debt, he replied that it was a "healthy situation" because the US has the most liquid debt markets in the world. One glance at the amount which Mr Greenspan is injecting into these same markets in "open market operations" on a daily basis would certainly confirm that, though perhaps not in so favorable a manner as Mr Snow would like.
Mr Snow was also asked about the prospects of the Euro taking over from the $US as the world's reserve currency. NO WAY! - said John. The only temporary blip right now is high energy prices (sound familiar?), according to John. Besides: "There is more of our currency outside the United States than inside the United States by about two to one." Yep, that's a direct quote.
OK, foreigners now hold about half of all outstanding Treasury debt paper in "private hands". On top of that, there are two $US 100 Bills circulating outside the US for every one that circulates inside. These are GOOD things, we have the word of the Treasurer of the United States of America on it.
Will there ever come a time when the expansion of US debt of all descriptions and maturities (including Federal Reserve NOTES aka US "currency") combined with the hollowing out of the US as a nation which produces REAL physical economic goods reaches a point where all these foriegn holders decide to maybe "lighten up" a bit? NO WAY! Well, that's the gospel according to Greeenspan, Snow, et al. If you believe them (yes - we said BELIEVE them), I have a stone bargain in a slightly used bridge which might interest you.
The debt debacle is something which is simply neither mentioned or discussed in polite (or even impolite) circles within the US political and financial establishment. They can't afford to draw any attention to it. And besides, if you listen to them, it's all temporary, just like the "temporary" energy prices. As always, there is a concerted drive to disconnect cause from effect. The effect is an economic "soft patch" caused by a "substantial rise in energy prices". The "cause" was manufactured when the US attacked and then occupied Iraq. It's those pesky "insurgents", it has absolutely NOTHING to do with our policies - either political, financial, or economic
This broken record has been playing, at various volumes and with various rates of repetition, for decades. The refrain is old, tired, and threadbare. The US variation of the tune has been at the top of the hit parade for a very long time, but it is now slowly but surely slipping down the charts. The US establishment is in denial, and the denials are starting to flow thicker and faster by the day. Just wait until Mr Bush is anointed as the Republican chosen one, that's when the cacophony will REALLY start to build.
Gold's move this week - against ALL paper currencies, not just the US Dollar - is like another leak being sprung in an overflowing dam. The US version of the "little Dutch boy" is fast running out of fingers and toes.
So, what is keeping the rest of the world in check? Why are they still adding to their US paper "assets"? Why has nobody stopped buying, let alone started selling? There are many reasons, but here's one of them.
Please read this news item, which appeared recently on the website of the British Broadcasting Corporation (BBC). It is a report of a visit by a BBC reporter to the Federal Reserve Bank of New York, home of the "world's largest pile of Gold."
Read it? Can you spot the telling sentence? Here it is: "Most of the subterranean gold here belongs to foreign governments, although the Fed's employees are not at liberty to say exactly which."
The foreign governments own the Gold, but they don't have it, it is in the United States. In international relations as in interpersonal relations, when push REALLY comes to shove, possession is nine-tenths of the "law". Like we said, there are many reasons why the rest of the world are reluctant to upset the US financial apple cart, but this is certainly one of them.