Friday, January 5 was the end of a shortened three-day trading week for Gold on US markets, Mr Bush having ordered US stock and commodity markets closed on January 2 to commemorate the death of ex President Gerald Ford. On that day, Fed Chief Ben Bernanke gave his first speech of the new year. As reported on CNNMoney - Mr Bernanke's chosen subject was the Fed's role in a crisis.
You can check out one of the Fed's (and the Treasury's) roles in a "crisis" by perusing the Gold chart above. As you know, on January 5, the spot future price plummeted by $US 19.30 to $US 606.90, it's lowest level since the end of October 2006.
In his prepared remarks, Mr Bernanke stated this: "In a situation of financial stress, the Federal Reserve's supervisory function helps it to obtain timely and reliable information on conditions in the banking sector". He continued by stating that such information helps the Fed "...maintain the in-house expertise necessary to gather and evaluate such information quickly and to make sound judgements about possible policy responses."
He then let loose with a real broadside. "I am not aware of any evidence that monetary policy decisions have been distorted because of the Fed's supervisory role."
Having made that clear, Mr Bernanke went on to give examples of the Fed's "crisis management", citing in particular the Fed's action after 9/11, injecting massive amounts of liquidity into the banking system which avoided payments systems logjams and ensured that adequate credit was available to the US economy.
But of course, the Fed's supervisory role NEVER has any effect, let alone "distorts", monetary policy. This would be hilarious if it wasn't so dangerous, and tragic. After asserting that he was aware of no evidence of such practices, Mr Bernanke goes on to cite one example (amongst many he could have chosen), of twisting "monetary policy" right off the spigot.
One stands in awe of the mentality of those who are "reassured" by such flagrant contradictions. Perhaps not, in this case. Mr Bernanke was addressing an audience of "finance and economics professionals".
The year of 2007 has certainly started with a bang. On January 3, a headline in the London Financial Times read as follows: US Markets Surrender To Inflation Fears. Problem was that the US markets were just then opening up for the new year. Two trading days (Jan. 3-4) later, the price of oil had plummeted well over $US 5.00, commodity prices were diving across the board, and the US Dollar, which had dipped below the 83.00 level on the USDX at the end of the previous week's trading, had rebounded strongly.
After a London PM fix of $US 642.60 in London on January 3, the "markets" in New York lost no time in "rectifying" the situation and spot future Gold closed its first day's trading down $US 8.20 at $US 629.80. As already stated, by the end of the week, it was down to $US 606.90. The catalyst for the Gold sell-off on January 5 was a report by the US Labor Department that "non-farm" jobs in the US were up by 167,000 in December (the "consensus forecast" was 115,000). The Labor Department also revised the October and November figures - up, naturally. This led to instant weakness in the precious metals and instant strength in the Dollar on the assumption that the Fed wouldn't be lowering US rates in the immediate future.
If US jobs don't go up in December, they will never go up at all. Christmas hiring will take care of that. "The Street", however, simply looked at the numbers, decided that the Fed wasn't going to raise rates, decided that this would mean that the Dollar would remain "strong", and promptly bought Dollars and sold Gold. At least this is the rationale behind what happened.
But look at the bigger picture. As 2007 begins, the Bush Administration is under huge pressure to change their "policies" on Iraq in particular. The US political AND financial establishment is in disarray and is watching their global influence decrease with every passing day. As analysed in the current issue of The Privateer (Number 568 - published on December 24), the rest of the world is inexorably "diversifying" out of US Dollars.
None of this has changed in any form whatsoever at the end of the first trading week of 2007. What HAS changed is prices on the markets. At the close of trading for 2006 and as the rest of the world opened for business on January 2, 2007, Gold was threatening to break above the "glass ceiling" of $US 640 while the commodity currencies were approacing multi-year highs. The Aussie Dollar, to take one example, climbed as high as $US 79.83 in early trading on January 3. The situation was spiralling rapidly out of control.
Something had to be done. It was done, as the amazing "market action" in the US so clearly illustrates. With absolutely no change in the underlying geo-strategic, geo-political or financial "fundamentals", almost every market in the US has done an abrupt about face from the direction it was going at the end of 2006. This is not new, of course, the financial "authorities" often choose the first week of the new year (1988 was an excellent example) to give the "markets" a nudge in their favoured direction.
The problem here is that in, say, 1988 (the year after the October 1987 crash), the US had the heft to get the world to go along and the direction set over the first week of the year lasted for at least a few months. Today, almost 20 years later, that influence has been squandered and the means to threaten the rest of the world with dire consequences if it fails to go along are simply no longer there.
Mr Bush is scheduled to give either a speech or a press conference in the week to come dealing with his plans for Iraq. His publicised plans for a "surge" involving more US troops is coming under fire from all directions inside the US - even the US military is vehemently and publicly opposed to it. The Democrats have taken control of the US Congress. While there is the the usual talk of "bipartisanship", the new Speaker of the House, Nancy Pelosi, has sent an "open letter" to Mr Bush stating that his "surge policy" would be a "serious mistake".
The situation is dire. Mr Bush cannot afford to give an inch in Iraq. Neither can the US political or financial establishment. To do so would be to expose their inability to enforce (if necessary) their policies on the rest of the world. The US was a disproportionally powerful nation in the early 1970s and so could "afford" to withdraw from Vietnam. That is NOT the case more than three decades later.
With the pressures so vast, a holding action was ESSENTIAL. We have seen it over the first trading week of 2007, exemplified by the crash dive in the price of Gold, Silver, and oil and in the miraculous recovery of the US Dollar. How long will this last? There is no way of knowing. There are only two certainties. One is that an escalation of present US foreign policy will end in certain disaster - both political and financial - for Americans. The other is that any "backing off" in Iraq will end in certain disaster for the US political and financial establishment. They are well aware of this, hence the market "action" this week.