For the first time in many months, The Privateer has sent out Gold alerts to our Subscribers and to those who had joined our mailing lists. The first one was sent out on November 27, when the spot future price of Gold rose $US 3.60 to close at $US 270.30, thereby breaking out of a frozen $US 2.50 (spot future closing basis) trading range in which Gold had been trapped for a month. The second alert was sent out on December 6 when Gold "surged" again to $US 274.30 and the Australian Gold index traded ABOVE its 200-day moving average for the first time in a year.
The $US Index (Privateer subscribers click here) hit its highest closing level this year - 118.45, on Friday, November 24, the day after the Thanksgiving holiday. Gold did not trade on that day.
Between November 24 and December 4, as the political logjam in the U.S. worsened, the situation began to take its toll on U.S. financial markets. U.S. stock markets (especially the Nasdaq) swooned severely. Yields along the curve for U.S. Treasury debt plummeted, as more and more investors fled to a "safe haven". And the Dollar itself took a severe drubbing. Gold over this period did essentially nothing, trading at or about the $US 270 level.
Then, on Monday, December 5, the U.S. political establishment trotted out one of their BIG guns. No, it wasn't Mr Bush, or Mr Gore, or even Mr Clinton, it was MR GREENSPAN! At a New York Bankers' conference, Mr Greenspan chose to imply (or at least he was interpreted as implying) that the Fed was looking favorably on the prospect of lower U.S. interest rates in the new year. Mr Greenspan knew EXACTLY what the effect of his speech would be. It was not long in coming. The Nasdaq soared 10.5% with the Dow up 3.2%. Even the $US index was up 0.81 points (113.65 to 114.46).
The next day, December 6, was VERY interesting. The $US index gave up more than it had gained on the previous day, falling 1.20 points to 113.26, its lowest level since Sept. 30. The Dow gave back two-thirds of its gains on the previous day. And Gold "surged" again - up $US 3.90 on the day to $US 274.30. As already stated, Mr Greenspan knew exactly what the effect of his December 5 speech would be. What he did NOT count on was that the effect would last for only one day.
The Jury is still out on that one. By the end of this week, the Dollar had consolidated and so had the Dow. The Nasdaq was off and running (upwards) again. And Gold was slowly sliding back towards the $US 270 level.
"The U.S. political establishment is in a fight to the finish. The ferocity of that fight is not best reflected in Mr Gore's repeated attempts to recount the Florida votes. It is best reflected in the fact that Mr Gore and the Democrats have not backed down in the face of the increasing and increasingly obvious damage being done to the U.S. financial system. The latest casualty is the Dollar itself."
(Gold Commentary - December 1, 2000)
Mr Greenspan knows that the latest U.S. current account deficit (for September) was a record $US 34.3 Billion. He knows, even if the majority of those on Wall St. seem not to, that a major impetus behind the U.S. market (and Dollar) surge of recent years has been overseas investment. He knows that the month long Presidential election is not exactly enhancing foreign confidence in the U.S.. And he knows that such confidence MUST be maintained to keep the foreign money flowing in.
Yet ever since the Fed began to raise U.S. rates back in June 1999, it has negated the effect of these higher rates with ever higher rates of monetary expansion. In late November this year, that monetary expansion was running at a 20% annualised rate. The Dollar couldn't take it any more, and began to sag. And now, Mr Greenspan has implied that the Fed is considering taking the risk of lowering U.S. rates with the Dollar already in a downward trend. Things are getting pretty desperate out there.
Given the fantastic orgy of lending indulged in by the U.S. banking system over the past couple of years and the amazingly accomodative stance of the Fed, an eventual financial "crisis" was always a certainty. But the election logjam has potentially sped up this process. Since the election on November 7, the symptoms have mounted rapidly. Plummeting Treasury yields, plummeting stock markets, a credit-freeze on corporate bond markets, ever accelerating trade deficits, and a falling Dollar. Now, even the $US Gold price is showing some tentative signs of life.
Mr Greenspan has taken a BIG risk by implying that the Fed is about to start to lower U.S. interest rates. So has the U.S. political establishment. They can't agree on who they want to be President. They can't agree on what policies the new President is to follow. All they can agree on is that the chaos on the "democratic" front (the hung election) must not spill over to the financial front. They have now wheeled out their biggest gun - Mr Greenspan - to try and make sure that it doesn't.
So far, the first "broadside" has not worked too well. If Mr Greenspan was to lose his aura of infallibility, then ALL bets are off. We wait, and watch.