As you may remember, the headline to the previous Gold This Week, written only a week ago, was Gold Really Is At Decade Plus Highs. And so it was, in terms of Euros and Yen.
A week later, and Gold is no longer at those decade-plus highs, thanks to a swoon on the Comex on July 1 which dragged $US Gold back below the $US 430 level to close for the week at $US 428.80. Gold fell against the other major currencies too, including the Euro and the Yen, but it didn't fall very much. The reason was a surge on the $US index - which rose 1.02 points to a new 2005 high of exactly 90.00 on July 1.
So, what's politics got to do with it? In a word, just about everything. The simple fact is that politics and economics are, always have been and always will be inextricably intertwined. People have been thinking and writing about politics for as long as they have been writing about anything, long before Aristotle penned his "The Politics" more than 2300 years ago. And what we now know as "economics" was, for most of the time since it emerged as a specific study in the eighteenth century, known as "political economy".
But if you want to see the modern day perversion of the disciplines of both politics and economics, you need consider only one fact. Today, it is taken as the given and the granted in the politics of every "advanced" and "democratic" nation on earth that an election is a contest between two groups whose main claim for allegiance is their professed ability to "RUN" the economy. In some cases, the phrase "RUN the country" is used. It amounts to the same thing, as a moment's reflection would make clear.
In current circumstances, however, it is raw politics, undiluted by any semblance of economic sanity, which has pushed itself even further to the fore than it usually does, a development which is always dangerous.
The problem centers in the US. It is a recent phenomenon, indeed one which has only broken into full flower within the past month or so. All of a sudden, the "natives" - the American people - are getting restless.
The most dangerous evidence of this restlessness to politicians on both sides of the aisle in Washington DC is the rapidly growing dissatisfaction with the situation in Iraq (and even in Afghanistan). Over the past month, polls have come out showing the following:
To put it bluntly, the second term of the Bush Administration is crumbling fast, and is seen to be crumbling fast, less than six months after Mr Bush's second inauguration in late January this year. The fact that this was seen to be happening in Washington was made last week when Mr Bush's main political "handler', Karl Rove, started popping up on the major US networks accusing the Democrats of being "soft on terrorism".
That went over like the proverbial lead balloon, so this week, it was suddenly announced that Mr Bush himself would make a "prime time" broadcast to the nation. The speech was duly made, at Fort Bragg, on June 28. It offered absolutely nothing but more of the same. It was watched by a record low audience of about 23 million. It was given in front of elite US troops, all of whom maintained a deafening silence throughout. In short, Mr Bush bombed in Fort Bragg.
The Bush Administration is caught in a trap - a political AND economic trap - of their own making. They would not admit it, of course, but it is clear to them that they are in a "war" in Iraq which they cannot possibly win, short of "nuking" the whole country. The similarities with Vietnam are certainly there, but the Iraq situation is much worse. On the economic front, the gulf between spending and production continues to widen and, as official interest rates rise, the gap between debt servicing and financial viability continues to narrow.
It is in this context that the upward bound in the US Dollar on July 1 is so piquant. Two reasons have been put forward for this jump. The first is a reported increase in US manufacturing production in June. The second is the Fed statement which accompanied the rate hike of June 30 that monetary policy remained "accommodative".
This was immediately taken to mean that the Fed was going to go on tacking 0.25% increases to US interest rates, with many pundits now predicting a 4.25% Fed funds rate by the end of this year. With four more FOMC meetings this year and the Fed Funds rate now at 3.25%, four more 0.25% rises would indeed bring the year-end figure to 4.25%.
This new scenario is said to be good for the US Dollar, especially since rumours have been circulating for some time that the the Bank of England and the ECB may be contemplating LOWERING their rates. A widening yield spread between the Dollar and these currencies must be good for the Dollar, right?
That is, of course, also the rationale behind the sudden fall in the $US Gold price on July 1. Two weeks ago, grave fears were beginning to surface about the future viability of ALL currencies. A week ago, most pundits were certain that the Fed would be signalling at least a temporary end to their rate rises on June 30. Now, the prospect of higher official US rates fills everyone with glee. There's an old movie title which springs to mind - "It's a mad, m-a-d, Mad, M-a-d, MAD, M-A-D world".
Mad as in crazy, of course. In any sane world, the more reputable and viable the borrower, the lower the rate that borrower can get. Of course, it is a long time since the world has seen sanity in either politics or economics. US indebtedness was unsustainable when the Fed was lowering its official rates from 6.50% to 1.75% in 2001. It was equally unsustainable when those official rates were held at 1.00% between June 2003 and June 2004. How unsustainable is it when rates have more than TRIPLED in the year since June 2004, and are now expected to go on rising throughout this year?
The answer is, of course, that the situation is NOT sustainable. It is being sustained by the galactic leverage being employed by the entire credit-creating global credit mechanism, hedge funds, currency traders, derivative jockeys et al. As long as the level of increasing leverage keeps pace with the increasing interest rates, AND as long as the wielders of this leverage continue to see "risk" as nothing more than a board game invented by Parker Brothers, this situation "can" be sustained.
The comparatively new problem is that below the froth of all this frantic credit-creation and yield chasing, there is a growing political dissatisfaction popping up all over the world, but especially in the US itself. The Bush Administration has noticed, as witness Mr Bush's lame speech this week. The G-8 has noticed, and will be meeting next week in Scotland.
Politics and economics are inextricably intertwined, always have been, always will be. Gold is, of course, the political metal. Gold went down on Friday, but interestingly enough, Gold stocks didn't. This mechanism is getting as old and tired as are the time-dishonoured political machinations which accompany a war, any war. More and more people are seeing through the second. And more and more people are seeing through the first too.