"Suffice it to say, for now, that we are witnessing the biggest bet in recorded history that Mr Greenspan and the Fed will lower U.S. interest rates. More, we are seeing a humongous bet that he will lower them a LOT. Still more, this is a bet that he won't wait for the next FOMC meeting (on Jan 30-31, 2001) before he starts lowering them."
From the Dec. 22 Commentary: "Pssst! - Get Your Rate Cut Here"
Well, that might be ancient history now, but it wasn't ancient history on December 22, 2000. Needless to say, the Fed obliged. It waited one trading day in the new year, didn't like what it saw, and promptly cut rates. Not only that, it cut them again THE VERY NEXT DAY with a further 0.25% cut to the Discount rate. There is one thing we can be perfectly sure of. If the Fed didn't like the way that U.S. markets started the year 2001, they will find the way that they ended the first week of 2001 positively abhorrent.
Actually, that is a blanket statement to which there is one exception. The Fed doesn't like the fact that U.S. markets have given back all the gains they made on January 3. They certainly don't like the fact that the $US index gave back all its January 3 gains (and then some), either. They cannot be too sanguine about the bad earnings reports which are flooding out of Wall Street. And they will not be overjoyed about the rumours that the Bank of America is about to topple because of derivative exposure and its lending to Californian utilities.
But they don't mind the $US Gold price. It hasn't done anything, besides fall $US 3.60 on the first trading day of 2001, before all the excitement got started.
The term "bubble" is a useful one in financial analysis, referring as it does to any market which has seen prices blown up to disproportionate levels. But, in this context, what is the opposite of a "bubble"? We don't know of a convenient word to use, but if one wants to describe the present $US Gold "price", that is what we are seeing. How about an "elbbub"? Kinda catchy - don't you think?
If you looked at Gold exclusively in $US terms, (and most people, not just Americans, do), you could be forgiven for thinking that it is dead. Actually, you know, it isn't. A pulse is still faintly detectable, and if you hold a mirror up before it, you can still see the odd breath. But $US Gold is not like a patient in an emergency ward, even though the machines recording its vital signs might make you think it is. In an emergency ward, all efforts are in the direction of saving the patient and getting him or her out of danger. With Gold, the efforts are all towards killing the patient stone dead, and making sure that the patient STAYS dead. But the darn stuff simply refuses to die.
So far, the $US as measured by the $US index has fallen 8.4% since November 24, 2000. Gold has done almost precisely nothing over that same time period. It was showing some signs of recovery in the last week of 2000. Now it is back on the emergency ward.
But if you don't happen to reside in the U.S., and if you have investigated the price of Gold in terms of your own currency, you will have noticed quite a different situation. Unless you happen to be Japanese, Gold is falling - fast - in terms of your own currency. In short, physical Gold is now on sale, just like almost everything else which didn't get hauled of the shelves before Christmas
Take a quick look at these charts:
Gold in Euros
Gold in D-Marks
Gold in Aussie Dollars
As you can see, Gold has become a lot cheaper very quickly indeed in terms of all these currencies - and many, many more. The big falls you can see on all these charts have mostly taken place in the first week of 2001.
What else has happened during the first week of 2001? The U.S. Fed has, literally, gone for broke. They didn't start "pumping" on January 3. By the last week of 2000, the U.S. M3 money supply was growing at a 20% plus annualised rate. The Fed was pumping as hard as they dared, and STILL they were getting no results. So, they decided to throw caution to the winds in another direction and slashed interest rates. The problem is, if the preliminary indications on U.S. markets and with the Dollar are any indication, that didn't work either!
We don't know if Mr Greenspan thought it would work or not. He knew it had worked in 1998, but he also knew that the situation facing him this time did not originate outside the U.S.. This time, the economy which has hit the wall is the U.S. economy. Mr Greenspan used to know all about this type of situation. He wrote a very good article all about it - called Gold and Economic Freedom, way back in 1966.
But throughout his tenure as Head Fed - stretching all the way back to August 1987 - Mr Greenspan has been doing precisely what he excoriated the Fed for doing (in the 1920s) in that 1966 article. Mr Greenspan has been INFLATING almost non-stop for more than a decade. He probably never thought he would see a situation in which he was "pushing on a string". He is now seeing it.
If you STILL don't think that Central Bankers manipulate Gold, read Mr Greenspan's 1966 article. If you STILL don't know WHY Central Bankers manipulate Gold, read Mr Greenspan's 1966 article. He knows why it is "necessary", and he knows how it is done. His problem now is that the only thing that he is still managing to control is the U.S. Dollar Gold price. Everything else - stock markets, bond markets, the currency, the derivatives markets, etc. etc. - is fast slipping beyond his control
The U.S. financial powers that be have established a "bubble" in U.S. financial markets, and a "elbbub" in Gold. The bubble hasn't popped yet, the Dow is still above 10000, but it would not be an unfair statement to say that it is leaking badly. (Can a bubble "leak"? Hmmmm)
In the first Privateer for 2001 (#415 - Published on Jan. 7), we examine the situation that the Fed now finds itself in. And, in light of this situation, we also examine the prospects for U.S. geo-politically and the prospects for the Fed regaining some control over the internal U.S. financial situation. Suffice it to say here that we don't put them as being very good. The U.S. Gold price now is just a matter of time. The longer it is successfully distorted, the more it will "pop" when the "elbbub" bursts.
HAPPY NEW YEAR to everyone reading this page. If you are not yet a Privateer subscriber, we think you will find our current issue a good one to start with. Here's what one of our subscribers had to say about it.
