There are now two more trading days left in the first month of 2006. And on the last trading day, the FOMC meets for the first time this year AND Mr Bernanke takes over from Mr Greenspan as head of the US Federal Reserve. We have MUCH more to say about this in the Global Market Report in the current issue of The Privateer - #544 published on January 22.
It has been a LONG time since there was a handover of power at the top of the Fed. The last one, when Mr Greenspan took over from Mr Volcker, was way back in August 1987. Since this one is happening on the same day as the FOMC meeting, and since there is a lot of concern in Gold circles that the Gold price is held down by any and all means available while the FOMC is meeting, let's take a look at the history of the Gold price over the past six meetings.
This table shows the date of the last six FOMC meetings along with the Gold price (on a spot future closing basis) a week before the meeting, on the day of the meeting, and a week after the meeting. Of course, at each of these meetings, the Fed Funds Rate was raised by 0.25%.
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In three meetings out of six, the spot future Gold price was higher the day of the meeting than it was a week before the meeting. In the other three, it was lower. The same is the case with Gold a week after the meeting compared with Gold on the day of the meeting. It was up three times and down three times. And comparing the Gold price a week before the meeting with the price a week after the meeting, the "score" is four to two against. Over the six two week periods, Gold was down four times and up twice.
This is pretty indecisive stuff, but there is one feature of the entire data series which is anything but indecisive. In all three columns, the last Gold price is SUBSTANTIALLY higher than the first one.
Everybody comes by their fair share of grey hairs sooner or later. Unless one is chin deep in the Gold futures market or heavily into trading Gold stocks on margin, there is no sense in speeding up the process by worrying excessively about week to week moves in the Gold price. Even the focussed figures given above are indecisive. But take a look at the upmove in the Gold price from the May to the December FOMC meeting. It started at $US 427.70 and ended at $US 521.00. That's up $US 93.30 or 21.8%. Right now, of course, the spot future Gold price is $US 558.80. That's $US 131.10 or 30.7% higher than it was in mid May last year.
Is there a vested interest by the monetary authorities in the US (and elsewhere) in keeping the Gold price as low as they possibly can? Of course there is. The reason is exactly the same as the reason for coming out with ridiculously massaged measures of official producer and consumer price inflation by excluding food and energy prices. And for the absurd underestimation of unemployment numbers using such methods as refusing to count as unemployed any person who is claimed to not be looking for work. It is the same reason that the US government claimed an official budget deficit last year of $US 318 Billion while the Treasury's funded debt over the exact same period rose by $US 553 Billion.
By now, it has been driven home to anyone with even "half an eye" open that government financial statistics are grotesquely manipulated and bear not a semblance of a resemblance to what is REALLY going on. Yet these statistics are presented as the nearest thing to holy writ in the financial press and are grabbed like life-preservers thrown to drowning men whenever they are released. Wall Street has its own versions of the same thing, exemplified by their favorite sport - the release of "earnings estimates". Have you ever wondered why companies are so often able to "beat the estimates", to the great delight of the stock market?
In modern finance and economics, the "game is rigged" - to an extent that would empty out Las Vegas in the twinkling of an eye - in favour of "the house". There are a lot of naked Emperors walking about out there. The current problem is that the instances when an unexpurgated piece of their anatomy flashes into the light of day are multiplying fast. The ever increasing and grinding fear amongst the money manipulators is the day when one or all of them stand undraped and undisguised in all their sagging splendour in full view of the formerly blinded multitudes. Such events are not common in history, but they do happen, and the occasion is chaotic, to say the least.
The problem is simple. A productive individual, business or nation must consume LESS than that individual, business or nation produces in order to create and perpetuate a WEALTH PRODUCING economy. The production of "money", whether by digging it out of the ground or by lending it into existence through credit expansion or by out and out printing is not a substitute for the production of economic GOODS. Economic growth is not measured by an increase in the amount of money spent, it is measured by an increase in the amount of GOODS produced. Nobody can be richer tomorrow by consuming all he has today and then borrowing to buy more of what is an ever-dwindling supply.
The problem is that the fiat-money based global financial system which is now midway through its fourth decade is an inexorable WEALTH DESTROYING mechanism. It cannot be anything else. The US Dollar has lost 98% of its purchasing power since the Federal Reserve was born in 1913. The vast majority of that loss of purchasing power has come since the Dollar became a totally fiat (backed by nothing but government promises and the printing press) currency in 1971.
Between 1913 (when the Fed was born and the income tax amendment was passed) and 1946 (the year after the end of WW II), the US Treasury's funded debt increased from $US 3 Billion to $US 270 Billion. The Treasury borrowed $US 24 Billion to fight WW I and $US 228 Billion to fight WW II. Add those figures up and the total for the two World Wars comes to $US 256 Billion. In the years between 1913 and 1946, the total debt increased by $US 267 Billion. Take a look at the numbers, the "peacetime" total was $US 11 Billion. The wartime (declared by Congress and therefore Constitutionally legitimate) total was $US 256 Billion.
When the US Dollar and Gold were severed in 1971, Treasury debt was $US 420 Billion. It is now almost $US 8,200 Billion. Nuff said?
Another point to ponder. When the Fed was born in 1913, total Treasury debt was $US 3 Billion and the population of the US was about 100 million. Today, total Treasury debt is $US 8,190 Billion and the population of the US is (just under) 300 million. The population has increased 200%. the Treasury's funded debt (there was no unfunded debt in 1913) has increased 272900%. How's that for an example of an "elastic currency"?
Oh, and by the way, while the population of the US has risen by 200% since 1910, the amount of Gold which has been produced in the world has risen by 300% over the same period. Can you imagine how unimaginably richer the world would be today if the amount of "money" produced since 1910 had equalled the amount of Gold produced? Under a pure Gold standard, it would have. We don't know of a better way to illustrate the principle that producing economic GOODS makes people richer while producing money makes them poorer.
Gold is in an uptrend - against ALL paper currencies (and there are no other kinds) - not just the US Dollar. This uptrend has accelerated since last November, pushing the Gold charts further and further above their moving averages and steepening their trajectories. All bull markets have downturns and outright corrections. The Gold bull market had a 10% correction about six weeks ago. All this is perfectly normal. Yet judging by the talk we see on the internet concerning Gold, those that pay any attention to the metal seem obsessed in identifying and getting out of the way of the "next" correction if they are not musing over whether the metal is or is about to come to the TOP of its bull run.
Richard Russell has stated that this bull market in Gold is one of the "sneakiest" bull markets he's ever seen. Mr Russell has seen more bull (and bear) markets than almost anyone else, most definitely including us. We can only concur.
The hallmark of the top of any bull market is a dangerous stew of complacency and greed fermenting in the minds of the participants. There is no faint trace of the former and not much evidence of the latter in the current Gold bull market, and that's amongst the participants. The vast majority of people haven't noticed it at all.
We fully understand that anyone working in the futures markets or on the stock market with borrowed money has to keep a daily or even hourly focus on the price action. That is NOT the case with owners of physical Gold. As long as the trend is intact - and it certainly is - there is no cause for concern whatsoever.
Yep, there's an FOMC meeting at the end of the month. And a new Fed Chairman too. Neither event will change the situation one iota, except to quite possibly make it worse. There is no escape from a radical overhaul of the present global financial and monetary system, the only trick is to NOT be there, or to be there to the minimum extent possible, when it happens. For that only three things are necessary. Minimise or eliminate debt. Live within your means. Own GOLD. After that, and only after that, you can play in the paper Gold market to your hearts content.
If and when you do, remember that the trend is your freind and the trend is UP. As long as it remains up, you have nothing to worry about. The problem of trying to trade within an uptrend is that the vast majority of people end up taking far less off the table than they would have if they simply let it ride and bought more as and when the means were available.
As for Gold itself, we cannot envisage a situation developing in the future in which it would be beneficial to your financial and economic future to own no Gold. Yes, the strains on the "system" as it is currently constituted are that bad - and they can only get worse.