The US Central Bank raised rates this week. On November 1, the Fed tacked a twelfth-straight 0.25% rise onto their Fed Funds rate, bringing it up to the 4.0% level. The Fed Funds rate has now QUADRUPLED since June 2004. Problem is, in terms of "real" (unadjusted by statisticians) price inflation, it is still in negative territory
The European Central Bank didn't raise rates this week. On November 3, the European Central Bank (ECB) met and left their rates at the same level they have been ever since June 2003 - 2.0%. M Trichet, the head of the ECB, said at the subsequent press conference that the ECB stood poised to raise rates "if necessary" at any time.
On June 29, 2004 the Fed Funds rate stood at 1.0%, a level which had been maintained for just over a year, since June 25, 2003. On that date - June 29, 2004, Gold closed at $US 392.80. The $US index stood at 89.70 points and the 1 Euro exchanged for 1.2066 US Dollars. Also on June 29, 2004, the ECB's official rate stood at 2.00% - a level it had remained at for almost exactly one year. The ECB rate was therefore exactly double the Fed Funds rate in the US.
On November 10, 2004, the Fed raised the Fed Funds rate by 0.25% to 2.00%. On that date, Gold closed at $US 434.50. The $US index stood at 84.50 points and 1 Euro exchanged for 1.2888 US Dollars. The ECB official rate remained at 2.00%, which meant that the EU and US official rates were equal.
On November 1, 2005, the Fed raised the Fed Funds rate by 0.25% to 4.00%. On that date, Gold closed at $US 460.60. The $US index stood at 89.92 points and 1 Euro exchanged for 1.2030 US Dollars. The ECB official rate was STILL 2.00% - a level which it retained through the ECB meeting on Noveber 3. Thus, the US official rate was now DOUBLE the EU official rate.
Several interesting points come out of this data. the $US/Euro exchange rate when the US rate was half the EU rate stood at 1.2066. Almost a year and a half later, after the US rate had QUADRUPLED and the EU rate hadn't moved at all, making the US rate DOUBLE the EU rate, the $US/Euro exchange rate stood at 1.2030. In short, it had all but remained stationary.
Over the same period - June 2004 to November 2005 - the $US index didn't vary much either. In June 2004 it was 89.70 points. In November 2005 it was 89.92 points. Of course, in the course of regaining its June 2004 levels the $US index had dipped as low as 80.60 at the end of December 2004 while the $US/Euro exchange rate had been as high as 1.3629.
Gold had simply been slowly but steadily been going up, against both the US Dollar and the Euro. Granted, the $US Gold price reached the mid $US 450s in December 2004 and didn't exceed that level until September 2005, but nonetheless, Gold is the only one of these measures which is substantially higher now than it was when the US started to raise rates in June 2004.
Of course, this week, the spot future Gold price fell $US 16.90, the oil price fell below $US 60 for the first time since May, and the $US index finally managed to claw its way above the 91.00 level, closing at its highest level since May 2004 on November 4 at 91.16. It's amazing what an 0.25% rise in official rates (especially since it's the twelfth in a row) can accomplish, isn't it?
The political situation in the US has collapsed in ruins (as it has in the UK). Mr Bush's popularity ratings continue to plumb new depths. Worse, his "integrity" is now in question with a majority of Americans saying they don't trust him - better late than never. The Libby indictments haven't helped. Nor has the increasing restiveness over his new choice for the Supreme Court, with the Congress this week refusing to bring forward the hearings and stating that they will not consider his choice until January next year. The only "clear sailing" politically is expected to be Ben Bernanke's nomination as Alan Greenspan's successor at the Fed. The hearings for that post are scheduled for November 15.
The economic indicators which reflect the REAL US economy continue to deteriorate. Durable goods orders are falling fast. Much worse, US orders for capital goods fell a massive 7.8% in September. All of the much touted third quarter US GDP "growth" of 3.8% was composed of government and consumer BORROWING. Treasury yields are at their highest levels this year. US mortgage rates are at 16-20 month highs.
The Gold sell-off this week has been attributed to the higher US official rate, to the usual "fund selling" - exacerbated by the worsening troubles at Refco, to the climbing US Dollar, to stronger than anticipated US economic "growth", and to the usual concern that the upward pace has not been maintained in late October as it was in September-early October.
Without a distraction soon from the parlous state of the Bush Administration and the US economy alike, the US political and financial establishment are at dire risk of a backlash from the US public. That continues to be staved off as the two main prices looked to as "inflation indicators" - the oil price and the Gold price - have come off sharply.
The problem is that while there has been a temporary easing in pump prices for gas in the US, the cost of living as a whole shows no sign of doing anything but continuing to increase. Nor does REAL inflation. Consumers continue to either borrow or declare bankruptcy. The US government has informed us that they plan to borrow $US 96 Billion in the last calendar quarter of this year followed by $US 171 Billion in the first calendar quarter of next year. The problem is being masked by the rising US Dollar, but with no REAL economic underpinnings beneath that rise (just the opposite), it can't last.
The $US Gold price is now almost back to its old December 2004 bull market high. The difference is that the US Dollar - as measured by the $US index - is now more than thirteen percent higher than it was back in December 2004. It has now just managed to exceed its levels when the Fed began its rate rising saga in June 2004. With rates now having quadrupled, that's not much to show for it all. The US Dollar is now 1.6% above its level when the Fed STARTED raising rates in June 2004. $US Gold is 16.6% above its level at the same time.
And don't forget, the ECB, the purveyors of the "competing" global reserve currency the Euro, have not "competed" at all on the interest rate front over that period. ECB rates haven't moved for nearly two and a half years while US rates are now four times as high as they were a year and a half ago. That's a lot of US pain for very little gain.