Since by the time you read this, it will almost certainly be January 1, 2005 where you live - A VERY HAPPY NEW YEAR TO YOU!
Here we are at the beginning of another year, after four consecutive "up" years for Gold in $US terms and nearly four years since the second bear market bottom in Gold ($US 255 set in April 2001). The annual record for Gold since its bottom in terms of $US is as follows:
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There are two items on this table which jump right out and bite you, well they sure as hell jump out and bite us anyway. The first is the simple fact that since the beginning of Gold's bull market in 2001, the $US Gold price is up a LOT more than the $US index is down. The second item is that in sharp distinction to the previous two years, Gold's increase in $US terms in 2004 was LESS, in percentage terms, than was the fall of the $US index.
That was not the case a month ago when spot future Gold closed at its 2004 high of $US 456.00 on December 3. On that date, the respective percentage rises for the year were: Gold +9.56% -- $US index -7.20. The $US index closed on December 3 at 80.98, almost exactly the same level at which it ended the year (see above). That was not the case with $US Gold. It ended the year $US 17.60 or 3.86% below the high it reached on December 3.
Here lies the main difference between Gold's performance in 2002 and 2003 and Gold's performance in 2004. In 2002-03, about half or more of Gold's annual rise took place over the last two months of the year - November and December. In 2004, Gold had a good rise in November - up $US 21.90. But in December, Gold did not keep going. Instead, it gave up more than half of the November gains. This December "turnaround" was what caused Gold to end 2004 being up less than the $US was down.
How this happened is not a particularly interesting question. The bullion banks and the commercial Comex Gold traders took a hit at the metal late in the year. Why this was NECESSARY is the far more germane question. For the answer to that, a glance at the level of the $US index throughout the month of December is all that is required.
The $US index hit a low in February 2004 which it did not decisively breach for nearly nine months - until the day after the US Presidential election and the day when Mr Kerry conceded victory to Mr Bush - November 3, 2004. For the next month, until December 3, 2004, the $US index accelerated downwards and Gold accelerated upwards. In the process of that downward swoop, the $US index fell below 81 by December 3, within ONE point of its post 1972 lows. As we pointed out here and in The Privateer at the time, this low at or about the 80.00 level is the ALL TIME LOW for the US Dollar in the post August 1971 fiat and "floating" currency era.
For 27 years, from 1944 until 1971, the US Dollar was a global reserve currency with an official connection to Gold. For 33 years, from 1971 to date, the US Dollar has continued to be the global reserve currency but it has NO connection to Gold - or anything else. Since August 1971, the $US has been nothing more or less than a fiat "backed by nothing" paper currency - as has every other currency on earth - including the Euro which counts Gold as an official "reserve" but which is not CONVERTIBLE into Gold.
As we point out at the top of this page - the introduction was written in early 1996 and stands as written - this is a unique phenomenon in the monetary history of the world. And in the history of the unique reserve currency backed by nothing which is the post 1971 US Dollar, it has never gone below (for more than a day or two) the 80.00 level on the trade weighted measure which is the $US index.
For the past month, the $US index has been hovering very uncomfortably close to that level, having closed at 80.98 on December 3 and as low as 80.60 on December 30. We headlined the Global Market Report in the mid December 2004 issue of The Privateer (#516): "The Most Important 'Support Point' In The World". The "support point" is, of course, the 80.00 level on the $US index.
Any sustained (more than a couple of days or a week at most) fall of the $US index below the 80.00 level takes the "floor" out from under the US Dollar's "post Gold" trading range. Any taking out of this "floor" puts the continued viability of the US Dollar as the world's reserve currency in grave doubt and hugely increases the risks of a global financial implosion. At the very least, it would be very difficult to persuade the rest of the world's (notably the Asian) Central Banks to keep on buying the $US 2-3 Billion per DAY of debt paper which the US government must sell to remain viable. Far more likely is not only a cessation of buying, but the onset of SELLING - Treasuries, Agencies, commercials, municipals, stocks, bonds, and the US Dollar itself.
Amidst all the twaddle about the continuing fall of the $US being a "good" thing because it would give the US a chance to "trade" their way out of their present deficit position, this is the REAL state of affairs. It may be, and in many cases probably is, the case that the US monetary and political powers that be would indeed like a lower Dollar. What they would NOT like is the consequences of a lower Dollar. Many of them are still hoping against hope that they can get one without the other, that no matter how far the Dollar falls, the rest of the world (and Asia in particular) will go on buying Dollars and Dollar debt paper - throwing "good" money after bad until nobody has any viable money left.
In December, the perceived consequences of a Dollar free fall clearly became too big to risk, at least for now. The Dollar stopped falling, Gold stopped rising, and then fell against the Dollar and still more against other major world currencies. The prospect of having to face the risk was postponed - UNTIL 2005.
Well now, of course, it IS 2005. Amongst the many things which stand in dire need of "resolution" this year, the most pressing one is the future of the US Dollar and with it, the future of the global monetary system as it has been established since 1971-73. This year, one of two things is almost CERTAIN (as certain as anything which has not yet happened) to happen. Either the US must take REAL steps to curtail its debts, its deficit spending, and its credit creation - or - the rest of the world will take the money away.
Either way, the US and the world faces the prospect of, at best, a severe economic downturn as the "fuel" which has fed the economic "growth" slows to a trickle or is turned off at the "tap". The simple alternative is that either the US does this itself or the rest or the world does it for them by simply refraining from buying more $US denominated assets. That's all it would take, a Dollar sell-off would not be necessary. However, should the $US index fall below and stay below the 80.00 level, a Dollar sell-off is what is most likely to happen, thereby elevating what is now a looming threat into a real and present crisis.
That is the BIG "resolution" we all face in 2005. No matter what the outcome, Gold in physical form in one's own personal private possession is a must. It's too late to buy a fire extinguisher when the flames are higher than the roof.