The headline below is nothing special, being simply a report on the "market action" on the precious metals on June 8. The first sentence in the article itself, however, is something else again. Here's a link to the article - and to that first sentence.
Metals - Gold tumbles, pressured by strong US dollar, falling oil prices
"LONDON, Jun 08, 2006 (XFN-ASIA via COMTEX) -- Gold prices tumbled, trading near yesterday's 6-week low of 616.15 usd, as the yellow metal remained under pressure from a strong US dollar, heightened inflationary fears and falling oil prices."
Sooner or later, it had to happen, and now it has. Ladies and gentlemen, boys and girls - Gold is being pressured by "heightened inflationary fears! It must be, it says so right there in this article!!
Those of you with a "literary" bent may remember that the "sequel" to Lewis Caroll's Alice In Wonderland was Through The Looking Glass - And What Alice Found There To give a sample of the flavour of the book, and of the "flavour" of financial commentary in today's markets, not least the paper-based precious metals markets, consider this quote:
"I can't believe that!" said Alice.
"Can't you?" the Queen said in a pitying tone. "Try again: draw a long breath, and shut your eyes."
Alice laughed. "There's no use trying," she said: "one can't believe impossible things."
"I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for half-an-hour a day. Why, sometimes I've believed as many as six impossible things before breakfast."
Please remember that Lewis Carroll (aka Charles Dodgson) wrote the books which made him famous in the 1860s, an altogether saner age than the one we live in today. They were written to entertain children, a task at which they brilliantly succeeded. The fact is that they entertained everybody, and they still do. In the Alice books, absurdities are the stuff of whimsy and are gently poked fun at. Today, they are the stuff of post-graduate university courses, everyday political "debate", and last but far from least, financial markets and the "analysis" of same.
A month ago, when the US Fed raised rates to 5.00% (on May 10), the press release which accompanied the rate rise stated that (US) inflationary expectations remain contained. This was said on a day when the spot future Gold price broke above the $US 700 level after having risen by $US 150 or about 27.5% in seven weeks. A bit less than a month later, at a conference of the American Bankers Association, Mr Bernanke is singing a very different tune. He pledged that the Fed: "Will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained." We have much more to say about this, and about the bankers meeting at which Mr Bernanke appeared flanked by the head of the ECB and the Bank of Japan in the Mid June issue of The Privateer - published on June 11.
It would seem that Mr Bernanke is not alone. Over the past week, no less than six major world Central Banks (including the European Central Bank - ECB) have raised their official rates of interest. All of them, without exception, have cited concerns over rising levels of "inflation" as the main impetus behind the rate rises. Yet on June 9, the spot future Gold price in New York closed at $US 608.20 - well over $US 100 below the bull market high it set on May 11, the day after the most recent FOMC meeting.
So there you have it. In the best of all possible "looking glass" worlds which are today's financial markets, the Gold price storms upward with "inflationary expectations" firmly under control and storms downwards when global monetary officials and Central Bankers suddenly start to take frantic actions to "control" that same (price) inflation that they reckoned nobody had noticed a month earlier.
What is it that has caused this abrupt about face in precious metals and commodity prices? Why it is "heightened inflationary fears", of course. In a perverse way, this is true. The difference is that these "heightened inflationary fears" have been held by the long suffering global public for many months now. What has changed is that now the monetary officials and Central Bankers are beginning to fear (price) inflation too!
And when politicans and Treasurers and Chancellors of the Exchequers and Central Bank chiefs and bankers in general get scared that the consequences of their actions are starting to get a bit too obvious, they ACT. Precious metals prices get poleaxed, the US Dollar stages a miraculous recovery, government bond yields hover at or even BELOW the official interest rate. And when all that is not enough, or when those in charge of the financial asylum reckon it's not enough because "inflationary fears don't seem to be going away, they go to extremes. THEY RAISE OFFICIAL INTEREST RATES.
Of course, when Central Bankers and financial "analysts" talk about "inflationary fears", what they are actually talking about is the fear of rising prices. Very few people actually fear inflation - increases to the total stock of money brought about by interest rate manipulation and credit expansion. What they fear is prices going up. And not just any prices. Nobody fears an increase in the price of financial paper assets - stocks, bonds etc. What they fear is the price of "things" - real things that actually exist and cannot be created with the stroke of a pen of the press of a key - going up.
When that happens, living standards suffer. When it happens to people who are already in debt over their heads - as the entire English-speaking world and large swathes of the rest of it already are - living standards potentially dive dramatically. Once a fear of rising prices of "things" takes a firm hold, there is always a rush to buy more, before prices rise still further. But with no more "borrowing capacity", that takes cash. And to get the cash, there is a rush for "liquidity".
In such cases, paper (including paper claims to precious metals) is sold off. That has certainly been the case this week with the mini crash on world stock markets and the continuing dive in commodities and precious metals on the futures markets. People aren't afraid of inflation, they are afraid of rising prices. In fact, it is precisely the prospect of a deceleration in the levels of inflation they have become used to which is REALLY putting the wind up them.
The "looking glass" aspect of what is now going on is the simple fact that the utterly absurd and totally unsustainable acceleration of credit creation and its attendant indebtedness which has surged ahead unchecked for decades is looked at as the "normal". The long delayed but always inevitable result of this financial profligacy has been put aside for just as long. This is the realm of the financially impossible (the Fed won't let it happen) or politically unthinkable.
Well, the long-delayed is not going to be delayed much longer. The "correction crisis" which the great Austrian economist Ludwig von Mises described as the inevitable end result of ALL periods of rampant inflation and credit creation is upon us - or looming on the near horizon. Those from Mr Bernanke on down (or up, if you prefer) who have fashioned a career from having: "believed as many as six impossible things before breakfast" have opened their eyes, and quite simply panicked.
As The Privateer predicted months ago - "The (interest rate) squeeze is on." The initial reaction has been knee-jerk - sell your paper "assets" for paper cash to meet what it coming at you. That won't last. What will follow it, as it always does in any "correction crisis" is a mad rush to escape from paper to the greatest extent possible. That's where Gold comes in, as it always has. Please remember, the demand for PHYSICAL Gold, as opposed to paper claims to Gold, has not gone down during this sharp Gold price correction. On the contrary, it has massively accelerated. Not everybody is looking through the "looking glass".