On the US Dollar front, the rot started last week:
"Just as they have already opened in the "policies" of the US government and in the US economy, the cracks have opened in the US financial system. The evidence is plain. On Wednesday, November 23, the US Dollar index (USDX) closed at 84.63. Two days later on Friday, November 24, it closed more than a full point lower with a new 52-week low closing level of 83.60.
Gold This Week - November 24, 2006
This week, we've had another full point plus fall on the USDX. It closed on December 1 at 82.42, that's down 0.43 points on the day and 1.18 points or 1.41 percent on the week. As you can see on the chart above, the $US Gold price was actually down $US 2.20 on December 1 with the $US 650 level obviously having been chosen as the latest "line in the sand" for Gold. On the week, Gold was up just under $US 6.00 or less than one percent, not reflecting the loss on the USDX. Consequently, of course, the Gold price actually fell on the week in terms of most other major currencies, notably the Euro.
Here's the lastest USDX chart - with 20-day Moving Average
Every basis point that the USDX falls from here is a new 52-week low. And please note that the index now is well over a point lower than it was in mid May this year - when Gold was making its bull market highs just above the $US 720 level. The lower the Dollar goes, the more the pressure will build UNDER the present Gold price.
Next week, the European Central Bank meets on Thursday, December 7. For most of the past month, it has been seen as an absolutely sure thing that they will raise official European rates at that meeting - by 0.25 percent to 3.50 percent. The ECB had a chance to raise in early November but didn't as it would have been seen as extremely impolite to do so just a few days before the US mid-term elections.
Now, of course, the mid-term elections are ancient history, having taken place nearly a month ago. The ruins of the Bush Administration's foreign policy are clear for all the world to see. Mr Bush has been repeatedly rebuffed in his "diplomatic" travels over the last week. He failed to get anything he wanted at the NATO meeting in Latvia and he was all but stood up by the Iraqi Prime Minister who was to have met with him for two days in Amman, Jordan.
The fact of the matter is that main prop for the "durability" of the US Dollar as the world's reserve currency has for many years been the military might of the USA. The last time that this was under equivalent strain, and seen to be under equivalent strain, was after the Tet offensive in Vietnam in 1968. 1968 was the year that the Johnson Administration collapsed. It was also the year that the French challenged the supremacy of the US Dollar by sending the US Dollars they were earning with their exports back to the US and demanding GOLD in return. Sovereign nations could still do that in those days.
That led to August 1971 and Mr Nixon's severing of the last link between the US Dollar and Gold. This was not an inevitable development. The US could have let the $US Gold "price" rise to reflect their actual position at the time, ceased their deficit spending which was leading to the trade deficit, amongst other things, and made good on their Dollars. But that would have meant cutting government spending substantially and THAT would have meant pulling out of Vietnam.
Several economists of the day, amongst them Jacques Rueff of France, made public estimates of how far Gold would have had to rise from its fixed $US 35 per ounce level of the day to accomplish this, assuming of course that the US also reined in their borrowing. The estimates varied, but a level of about $US 100 an ounce was deemed sufficient.
The last time that the Gold price was anywhere near $US 100 an ounce was in August 1976
Today, of course, the US is trapped in another military quagmire in Iraq (and Afghanistan). Their funded debt is about 25 times as high as it was in the late 1960s. They run up a bigger trade deficit in a couple of weeks today than they did in a year in the late 1960s. And today, the US is the world's biggest net external debtor. In the late 1960s, it was the world's biggest net external creditor.
Suffice it to say that the financial and geo-political stature of the US in the world has deteriorated HUGELY over the past 40 years. Further, almost all of the geo-political stature (without which the financial stature is not worth the paper it is literally printed on), has deteriorated since the Bush Administration lied themselves into their Iraqi adventure in March 2003. And while this deterioration has been obvious to most people in the world for at least the past three years, the real consequences have only begun to show up since the mid-term elections when the Bush Administration was finally rebuked by their own citizens.
Since November 7, the downward spiral has been spectacular. But so far, it has only shown up on the financial front with the sudden and big falls in the US Dollar over the past two weeks.
That's what happened at the beginning of the 1970s. The Dollar dived first - and all else then followed. The difference is that back then, even at the height of the pressures as the 1970s drew to a close and the Dollar threatened to implode completely, the US was still seen as the world's main guardian of political freedom. Today, the US is seen as the main threat to global freedom.
The empire of the USSR imploded, as did the nation, when it could no longer bear the cost of maintaining it. The same thing happens to all empires, and the same thing is now happening to the USA. The danger lies in the speed with which it is happening, which has increased dramatically in the weeks since the mid-term elections.
The ECB is still expected to raise when they meet next week, although the appreciation of the Euro against the $US over the past ten days has given pause, to put it very politely, to a lot of European politicians. We'll see what happens. The Fed is universally expected to stand pat when they meet on December 12 and almost universally expected to start LOWERING rates early next year. It will be interesting to see what they actually do if and when they are confronted by a USDX of 80 or lower.
Either way, Gold now has just under a month left to do what it has done in every year of its bull market so far - make a new bull market high in December. Wouldn't that be a nice Christmas present for us? And wouldn't it be an Unmerry Christmas for the Fed?
