So far, anyway.
So far in 2005 (a whole week into the year), the world's top performing currency is - are you sitting comfortably? - the United States Dollar. And, of course, Gold priced in those same US Dollars has declined every trading day so far this year. Over the first trading week of 2005, the $US is up 3.36% on a trade weighted ($US index) basis while Gold in $US terms is down 4.31%, or $US 18.90. As has been the case in pretty well all the $US Gold corrections since the beginning of the bull market in 2001, Gold is falling faster than the $US is rising.
With a sparkle in his eye, US Treasury Secretary Snow has come out again and reiterated the "strong $US policy" this week. The market "professionals" nodded knowingly, but also noticed that this time, unlike previous mouthings of the incantation, Mr Snow chose not to add the usual addendum that the US was in favour of exchange rates set by the market. This has now led to some conjecture that maybe the US wouldn't be adverse to some "smoothing operations" by the world's Central Banks, maybe even including the Fed, if that should prove necessary some time in the distant future.
There is, of course, absolutely no hint of anything on the horizon which would indicate a GENUINE change in US fiscal and monetary policy which might in turn lead to a REAL economic impetus for a strengthening Dollar. Nor is there any sign of financial "rectitude" in the US consumer sector. The opposite continues to be the case. One exceedingly ominous recent economic statistic states that in the third quarter of 2004, consumer spending accounted for 89.2% of real US GDP. Combine this with the fact that over the same third quarter, US private household spending outstripped earnings by almost 71% - US consumers spent $US 139.4 Billion while earning $US 81.6 Billion - and you have a growing "budget deficit" that puts even the one being run by the Bush Administration in the shade on a comparative basis.
We closed the current issue (#517 - Early January 2005) of The Privateer, published on January 2, with these words" "The BIG issue to be resolved is whether, and for how long, the $US index can remain at or above its vital 80.00 level. On the resolution of this question depends the immediate future of every major investment market in the world." As you now know, the $US index has spend the first week of 2005 building a buffer above that 80.00 level on the $US index. From a close of 80.60 on December 30, the $US index has risen to close at 83.72, its highest spot future close since November 18, 2004, on January 7.
On November 18, the last time that the $US index was at its present level of 83.72, spot future Gold closed at $US 442.90 on the way up to the $US 456.00 2004 high it set on December 3. Now, spot future Gold is back to its lowest level since October 18, 2004, the way to a higher US Dollar having been paved by an $US 18.90 fall for Gold over the first week of the new year. The closer the $US got to breaking below its post 1972 lows, the more acute the situation became and the bigger the necessity to turn the fall around. This has now been accomplished, at least for a week, and there has never been a "rally" in a $US bear market of any significance without an accompanying correction in a $US Gold bull makret.
The question is, of course, how long can this continue? The answer we gave in the current issue of The Privateer is - until the G-7 Finance Ministers meeting in February. After that meeting, one of three things will happen:
The plain FACT is that no matter how much they might like to, the rest of the world CANNOT continue to finance US fiscal and current account deficits and US credit creation much longer. To do so would do more than continue to erode the international purchasing power of their present pile of US "reserves", it would present them with the equivalent situation of what happened when the British reneged on their promises and cut the Pound from its Gold backing in 1931. That act almost destroyed the global financial system of the day and led directly to the global (including US) banking collapse of 1932-33.
Here is a quote from Barbara Tuchman's - The March Of Folly:
"In its first stage, mental standstill fixes the principles and boundaries governing a political problem. In the second stage, when dissonances begin to appear, the intial principles rigidify. This is the period when, if wisdom were operative, re-examination and rethinking and a change of course are possible, but they are rare as rubies in a backyard. Rigidifying leads to increase of investment and the need to protect egos; policy founded upon error multiplies, never retreats. The greater the investment and the more involved in it the sponsor's ego, the more unacceptable is disengagement. In the third stage, pursuit of failure enlarges the damage until it causes the fall of Troy, the defection from the Papacy, or the loss of a trans-Atlantic empire."
"Persistence in error is the problem. ...Yet to recognise error, to cut losses, to alter course, is the most repugnant option in government."
The course of history has abundantly and repeatedly confirmed the truth of this statement. It continues to do so. Clearly, in regard to the US Dollar and US fiscal and monetary policy, the world has long since reached "the third stage". No matter how much wisdom were to suddenly become operative, there is no way out of the global financial mess without a "correction crisis" (otherwise known as recession/depression) of large proportions.
"Persistence in error" is indeed the most repugnant option in government. That is the reason why the sharing of the error persisted in by government is so potentially fatal to your financial health. Our task both here and in the pages of The Privateer is to expose the errors, explain why they are errors, and show the inevitable end consequences in persisting with them. The very fact that the Dollar has "recovered" and Gold "corrected" as we enter 2005 shows how potentially decisive the year ahead will be. No one can know how long the trend which has started the year can continue. All that we know is that it is ultimately insupportable. That being the case, and Gold now being "cheaper" in terms of almost every currency than it was last week, the means to protect oneself is still readily available, and comparatively CHEAP.