Spot future Gold reached its 2006 and bull market high (so far) almost exactly four months ago when it closed at $US 721.50. From there, as we all remember, the price cascaded down to a low of 562.50 a month later on June 14. By the end of June, the spot future Gold price was back above the $US 600 level. And it has stayed above the $US 600 level ever since.
In the three weeks since August 18, Gold has tested the $US 610 level three times. It closed at 612.10 on August 18, $US 610.70 on August 29, and $US 611.40 on September 8.
The last FOMC meeting was on August 8. As you recall, the Fed decided NOT to raise interest rates at this meeting for the first time since May 2004. It did this in the face of the first undeniable evidence that the US housing bubble, which the US economy has relied on for most of its "growth" since the "recession" of late 2001, had come to an end. Looking at the situation, the Fed came to the conclusion that it did not DARE keep on raising rates for fear of drying up consumer borrowing altogether and pitching the US headlong into an economic disaster.
The last time that the entire US Treasury yield curve from 3-month to 30-year paper was at or above the Fed Funds rate was on June 28, 2006. That was the day before the Fed raised their funds rate to its present level of 5.25%. The yield curve has been below the Fed Funds rate ever since. To have the entire yield curve below the Fed Funds rate is an unusual occurrence. To have it below the Fed Funds rate for almost two and a half months is all but unprecedented. We are looking here at a ceiling on the yield of government debt paper, which in turn implies a limit on what the Federal government can pay to service its debt without blowing the entire fiscal structure of the US out of the water.
And, of course, the Treasury yield curve is inverted with two-year yields above ten-year yields. For all but eight days of the past three months, this inversion has been maintained. It is clear that with absolutely no "risk premium" built into the interest rate available on US Treasury debt paper, holders and buyers of same prefer to hold short-dated paper. It is also clear that with the yield curve having been inverted for most of this year - the first inversion occurred at the end of December 2005 - the situation is absolutely SCREAMING impending recession.
All of this, except the deflating housing bubble, is seemingly invisible to Americans at large and Wall Street in particular. US stock market indexes are frozen in aspic and have been for months. The US Dollar is in a trading range on the USDX between about 84 and 86. Oil prices are now at their lowest level for months.
The reason for this gartantuan "shear" between the actual fiscal and economic state of the US and the state of US "markets" is clear to see. It is, of course, the upcoming November mid term elections and the desperation of the Bush Administration and the Republicans to hold onto both Houses of Congress. If the Democrats wrest back control of one or (worse) both of them, the political jig is up.
The situation is so stark that Mr Bush has gone on a speaking tour this past week trying to justify his policy morass - foreign and domestic - by invoking the bogeymen of Adolf Hitler and Vladimir Lenin to justify his war on terrorism. Mr Bush is indeed desperate. It has been reported this week that his Administration is circulating draft legislation which he wants passed before November 7 and the possibility of a loss of control of Congress. This legislation would eliminate parts of the War Crimes Act of 1996 - which makes it a felony to commit "grave violation" of the Geneva Conventions. There is no shadow of a doubt that the Bush Administration has committed just such violations. The expectation in Washington is that this legislation will be part of a military appropriations bill, which few Congressmen or Senators dare vote against for fear of being branded "unpatriotic".
These are genuinely dangerous times, in all respects. The US has a rogue Administration running scared before the prospect of losing control of government. There is a gigantic aura of denial in US markets as the evidence that the US is terminally overextended financially and fiscally piles up.
We can only hope that the American people will repudiate the Republican party when they do go to the polls on November 7. And we can only hope they do so beyond the means of the party in power to "rectify". In the meantime, look for ever greater distortions in the political rhetoric of those clinging to power and in the markets which give them the wherewithal to cling to it.
As always, Gold is an excellent barometer of all this. It has now touched the same low each week for the past three weeks, only to bounce higher again each time. If it fails to do so next week, if it falls from here to touch or even go below the $US 600 level, then the distortions have ramped up to an even greater degree. The potential is certainly there. Monday is the fifth anniversary of 9/11.
The "problem", no matter how big the distortions grow, is that no economic system based on paper money backed by nothing has ever lasted in history. This one will be no different. But what are looking increasingly like its "death throes" are daunting to live through, to say the least. We are entering a period for which the ancient Chinese curse - "may you live in interesting time" - was invented.