"The rest of the world is not yet ready to drag the US Dollar down around their own ears. Given the policies and actions of the new Bush Administration, we don't think they will wait too much longer. The course of the $US index rally and the Gold correction will tell the story. Don't forget though, Gold HAS confirmed a new leg in its post 2001 bull market. It also has SOLID support at the previous (February - April) 2004 highs around the $US 430 level."
(Gold This Week - December 10, 2004)
The $US 430 level has certainly held, with Gold closing this week back above the $US 440 level. The "rally" in the $US has fizzled, with the $US index losing some ground this week. The Fed has done what everyone expected them to do, raised rates yet another 0.25%. The Bush Administration has gravely informed us that they plan to halve their deficits - by 2009, while asking for another $US 80 Billion for Iraq. Mr Bush has bestowed the Presidential Medal of "Freedom" on Tommy Franks, George Tenet, and Paul Bremer - grounds for burying the Oval Office hip deep in such medals as previous recipients return theirs in outrage. As 2004 drags to a close, the world becomes an ever more amazing place.
Louis XVI of France was quoted as having said: "Apres moi, le deluge!" History in the form of the French Revolution and the Napoleonic dictatorship certainly proved him eminently correct. Old Louis was the tail end of a French Dynasty (the Bourbons) who were one of history's premier examples of regal profligacy. Unlike many if not most in his Court, he saw the writing on the wall and knew that things could not continue much longer.
There are many in today's Republican party who can also see the writing on the wall. Unfortunately, they do not inhabit the White House nor do they fill the positions of the US political executive. Mr Powell (flawed as he became after his tragic UN speech of February 5, 2003) was about the last of them, and he has been eased out as Secretary of State. Mr Bush and his Administration give absolutely NO signals whatsoever that they recognize any limits at all - be they political, fiscal, monetary, or for that matter military. This dangerous blindness will survive 2004. We do not think it will survive the first full year of the second Bush Administration in 2005.
The longer the exclusive concern with ends combined with the utter contempt shown to means lasts, the bigger the potential for a massive collapse becomes. The fiscal and monetary policies now being pursued by the US government (ALL branches of the US government) would be the envy of any banana republic, or divine right regal spendthrift, in history. Show the current "balance sheet" of the US to any competent accountant without identifying the entity involved and he or she would immediately prescribe bankruptcy as the only possible "solution". Show it to any competent investment advisor, under the same criteria, and he or she would look goggle eyed at any serious suggestion that investment might be made therein.
The world is trapped. Its financial systems are based on US Dollars. It cannot go on accumulating them without assuring future financial ructions and it cannot rid itself of them without assuring that the financial ructions will be instantaneous. The world is engaged in a gigantic game of "musical chairs" with this difference. The participants don't dare sit down, for fear that there will be no chairs left to sit on. So, instead, they are all engaged in frenetic "trading", never daring to recognize the fatally flawed nature of the "assets" which they keep on accumulating. It reminds us of the old joke about the fellow who fell from the top of the Empire State Building. All the way down, he was heard reassuring himself - "So far, so good."
To an amazing extent, that is the precise attitude right now. "So far, so good!!". The Dollar got perilously close to tipping over the edge, but it hasn't. People are certainly selling Dollars, and Treasuries and agencies and corporates and stocks and derivatives and everything else, but the world's Central Banks keep buying as fast as they are selling. The precipitous Dollar decline which began with the Presidential election has taken a "time out" which may well last until the end of this year but which is certain to resume in 2005.
The post 1971/73 era, the era of global fiat money with NO backing except a given government's capacity for plunder (otherwise known as "full faith and credit") was doomed from its inception. Its excesses have exceeded anything imagined by the staunchest of its opponents back in the days when it was getting underway. Throughout the entire three decades plus, there have been well reasoned and eminently sound (in terms of economic theory) predictions of its imminent demise. None of them were "wrong", all of them proved premature. And, of course, as each "premature" warning came and went, the chorus swelled - "So far, so good!!"
Gold is the only vestige of the pre fiat/floating currency era which remains unchanged and inviolate from that time. It has spent nearly two generations having been politically forced onto the sidelines. Its function as a medium of exchange has been politically blocked. With that, its premier facility of preserving liberty by providing an inexorable brake on political profligacy has likewise been blocked. The results are all around us, everywhere.
"So far, so good!!" - the chorus is still coming - from Washington, from Wall Street, and from Main Street too. That's the way it always works, the biggest collapses are those which are least anticipated. Do we know WHEN the looming collapse will come? No, we don't. What we DO know is that it is coming. We also know that the best way to avoid the worst consequences of any man-made catastrophe is not to be there when it happens. To the extent that your debt is minimized or non-existent, to the extent that you own Gold (and some Silver) as financial insurance, and to the extent that you do not ignore the pavement which is rushing up from below to savage the global financial system, you won't be there.
With next weekend being Christmas, the next commentary will be posted on December 31, 2004. A very Merry Christmas and Happy New Year to all our readers.