Gold Commentary - January 19, 2001

A New President - Another Rate Cut?

"We are now two weeks into 2001. The Fed has already cut rates once, and has another opportunity to do so (which almost everyone, including us, expects them to take advantage of) on January 30-31 when the FOMC actually meets."
From the Jan. 12 Commentary

That was a week ago, and "today" (January 19, 2001) is the last day of the Clinton Presidency. Tomorrow (January 20, 2001), George W. Bush is inaugurated as the new President Of The United States. From the beginning, the events surrounding his Presidency shape up as being unique. From its beginnings - it took Mr Bush almost six weeks to be declared the winner of the November 7 election - to its commencement - the U.S. has recently shown the first unmistakeable signs of a retreat from an unprecedented "boom" period - this new Presidency will be like no other in recent U.S. history. One thing that The Privateer is absolutely certain of, Mr Bush will not face a "business as usual" Presidency over the next four years.

The next issue of The Privateer published on January 21, focuses on (amongst other things) the state of the U.S. economy and financial system as Mr Bush takes over. Suffice it to say here that the biggest questions to be answered in the early days of the Bush Administration are these: Will a series of U.S. rate cuts "work" this time, just as it has always "worked" before? And if it doesn't "work" this time, what other choices does Mr Bush, his Administration, and the Greenspan Fed have?

One (amongst many) unique featues of Mr Clinton's two terms in office was the fact that in the face of financial crises which hit every other part of the world, the U.S. was not adversely affected (except temporarily) by any of them. Another was a fundamental switch in the generation of U.S. debt. U.S. government deficits peaked in 1991, but the generation of new U.S. debt did not. The difference is that the main engine for the generation of this debt has switched from the "public" sector to the "private" sector.

This presents a problem. The U.S. private sector (especially American "consumers") does not posess the power to manipulate the amount of U.S. Dollars or the levels of U.S. interest rates at whim. That power is reserved to the U.S. government - and the Fed. The U.S. government, U.S. money-center banks, and the biggest U.S. corporations are all deemed "too big to fail". But the vast majority of U.S. businesses, and all U.S. consumers, are not "too big to fail". At some point, when the debt does not go down but the income/profits/dividends do, they have to pull their horns in.

Given the fact that "consumer spending" constitutes about 60% of U.S. GDP, this is a problem. ALL signs are now pointing to the conclusion that U.S. consumers have finally got to the point where they simply CAN'T borrow any more, regardless of the height of interest rates. If they can't borrow any more, then U.S. economic "growth" is under the most severe threat it has been for decades, given the present height of private sector debt and the complete absence of savings.

The long and short of it is that Mr Bush, Mr Greenspan et al are going to have their work cut out for them.

The Gold Elbbub

Definition: 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?

Here's the latest from the charts of Gold in "other" currencies. Please note carefully that looking at these precipitous dives, no one would come to the conclusion that there was any type of "link" between Gold and any of these currencies. The U.S. Dollar is (still) the world's Reserve Currency, and the impression is still being maintained that there IS a "link" between Gold and the $US. That's why the Gold "elbbub" is being maintained.

Here are the charts:
Gold in Euros
Gold in D-Marks
Gold in Aussie Dollars

This week, Jan. 16-19), Gold has hardly moved in $US terms, and it has stopped its steep falls of the past month in terms of other currencies. Gold is simply laying there limply, doing nothing at all.

We are three two weeks into 2001. The Fed has already cut rates once, and will almost certainly do so again on Jan. 30-31. The problem is that both U.S. stock and bond markets have already discounted the prospect of this rate cut. When they get it, they will immediately start looking for the next one. And with that attitude, at some point, the prospect of unending rate cuts will have its effect on even such a "strong" currency as the U.S. Dollar.

Mr Bush and his new Administration are about to get their hands on the Washington "levers". He has an immediate "problem" with the California power crisis as one of the big West Coast utilities has just defaulted on a debt payment. On top of that, as California is switching more and more to oil-fired (diesel) generators to produce electricity, the oil price is surging once again.

Meanwhile, the Gold "ellbub" is almost completely stationary, not only in terms of $US, but in terms of almost everything else too. It is quite fitting that it should be so, as the transition from the "old" President to the "new" one takes place. The pressure on the U.S. economic system continues to grow. The evidence of slowdown and actual recession in widening pockets of the U.S. economy continues to accumulate. Gold is now at solid "support levels" in $US terms. If the upcoming Bank of England Gold auction (on Jan. 23) cannot get the Gold price below its 2000 lows, we may be in for the prospect of another "bottom" forming. Let's wait and see.