We began our report last week with the quote below. Given the developments on the Gold price this week, we include it again. Please have a read to refresh your memory, it's a short article
WASHINGTON (MarketWatch) - Monthly capital flows to the United States reversed in December to the first outflow in a year-and-a-half, the Treasury Department reported Thursday. Monthly capital flows reversed to an outflow of $11 billion in December compared to an inflow of $70.5 billion in November. In December, private investors sold $42.5 billion of securities. This was offset by $31.5 billion in purchases by official institutions. Net long-term capital inflows, meanwhile, fell to $15.6 billion in December from $84.9 billion in November. This is the lowest inflow since January 2002.
As you know, this week was a short week in US trading with the holiday on Monday for Presidents Day. As you also almost certainly know, Gold started the week with a BIG bang, falling $US 11.70 on February 20 and then turning right around and soaring $US 23.10 the very next day. There were no developments - economic, political, or geopolitical - to account for the fall on February 20. Nor were there any to account for the rise the next day. They just "happened".
By the end of this week, however, the REAL reasons why the US and global financial system are getting very fragile indeed were surfacing. US stock markets, as measured by the Dow, actually reached yet another new all time high on February 21, the same day that Gold had its huge rise. These markets have been going down since, not by much - it is true, but going down nonetheless. By the end of the week, one of the reasons given for this so far very mild bout of US stock market weakness was increasing concern about the state of the US "sub-prime" mortgage sector.
With the major market commentary websites and news sites now reporting on this, it isn't going to go away. The catastrophic falls in the stock prices of more and more "sub-prime" mortgage companies and the bankruptcies of many more has become too big to ignore. It is cited as a factor in a blip up in Treasury bond yields in the middle of the week, and also in a "less robust than expected" auction of Treasury five year paper this week.
Last week, the US Senate was debating the "lending practices" of the "sub-prime" market. This week several Federal Reserve Board Governors, including Susan Bies, have attempted to hose down the situation by stating that the "rest" of the mortgage market is doing fine. The problem is that even if that were true, there is going to be an inevitable tightening of lending standards in the US. With that, it will become more difficult and expensive to borrow. With that, the consumer spending which is the backbone of US economic "growth" will falter. And with that, the mirage of economic "health" which has so far sustained the US markets for paper assets of all descriptions will disappear.
"The consensus has been it's (the sub-prime defaults) going to be contained. Now people are questioning that," said Bill Strazzullo, the Boston-based chief market strategist at Bell Curve Trading. "It's going to start with the weakest credit and work its way up."
That is a short excerpt from a Bloomberg report on Friday which was bemoaning the Dow's biggest one week drop since August last year. For the record, the drop was mild - less than 1.0 percent. But the growing unease on Wall Street is out of all proportion to this so far mild drop. Any collapse or even pullback in debt-based paper always starts in the "junk" sector, and in mortgage lending, the "sub-prime" loans definitely fit that category. The severity of the economic recession which always follows a binge of credit creation is defined by how far up from the weakest credit it goes.
It is clear to almost everyone, including those on Wall Street, that the quality of debt paper being issued by the US economic system has never approached the level of weakness that it stands at today. The "twin" (current account and trade) deficits are at levels never approached in US history. So is government debt and deficits. So is consumer debt. So is mortgage debt. And all this is occurring while the US manufacturing sector (the only sector of the US economy which produces REAL wealth) is withering away and the US savings rate has been in NEGATIVE territory for almost two years.
The Fed is trapped in a cul de sac of their own making. They cannot afford to raise rates for fear of choking off borrowing and intensifying the bankruptcies at the weakest end of the credit spectrum. They cannot afford to lower rates for fear that the US Dollar would collapse. That is bad enough, but the Fed has an even bigger fear. They are worried that even LOWERING US rates would NOT re-start the level of borrowing necessary to keep the credit expansion and thus the economic "growth" going. Finally, the Fed knows that they cannot sit on their hands much longer. Official US rates have been unchanged since last June. Over that period, every other major Central Bank in the world has raised rates, most of them more than once. Even the Bank of Japan joined in this week when they doubled official Japanese rates - from 0.25 percent to 0.50 percent.
What is happening is that just as the Bush Administration has lost control of the global geo-political agenda, the Fed and the financial establishment of Wall Street is slowly but surely losing control of the global geo-economic agenda. Above all, the gargantuan debt overhang weighing down the US Dollar is making its continued role as the world's "reserve currency" untenable, and almost everyone is slowly but surely waking up to that fact.
Gold had its biggest one-day rise for a long time this week. Given the increasingly desperate situation in the US economy, it promises to be the first of many. There is no way to predict how much worse the situation will get, or the time frame, or the reaction of US and world markets to the situation. It is as predictable as ever that every means will be used to try to prevent a runaway Gold price. It is equally predictable that these means will ultimately fail. The evidence of a credit implosion in the US is growing. Worse, it is now being acknowledged in the mainstream media.
As you can see from the table below, Gold prices in all the currencies listed set new 2007 highs on Friday, February 23. In the case of the Yen Gold price, new bull market highs were set two weeks ago and, of course, the price has risen further from there.
We will be running this table until Gold prices in all four currencies have exceeded their May 2006 highs and thereby signalled the next leg in the global Gold bull market. We have no idea how long that will take. We have no doubt that it will happen.
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