As you undoubtedly know, spot future Gold shot up $US 10.30 on April 13 (Friday the 13th, no less) to close at $US 685.40. That's only $US 1.80 below the $US 687.20 spot future close of February 27 which is Gold's high for the year so far. Even more intriguing, Bloomberg reported that this sudden jump in Gold was being caused by "demand for a dollar alternative." Bloomberg went on to point out that the US Dollar was at a two-year low against six major currencies and that Gold (and Silver) has now risen for six weeks in a row.
Why would a "dollar alternative" be discussed in the US mainstream financial media? Here are a few reasons we've seen in print over the past week:
On top of all that, the minutes of the most recent (March 20-21) FOMC meeting were released this week. In them, there was a lot of talk about US (price) "inflation" still being too high and the possibility was raised that the Fed might have to at least contemplate further interest rate increases if that continued.
Of course, the Fed avoids any talk - in public or in private - about the REAL level of US inflation, as exemplified by the $US 262.7 Billion (see above) which the Federal government spent in March. They also avoid hinting in any way that this blowout in government spending - and deficits - might have something to do with the increasing weakness of the US Dollar. The Fed does not want to drop any hints, however veiled, that any future rate increases might have something to do with a desperate attempt to prevent the US Dollar from plummeting below the 80 level on the $US Index (USDX). Please note that this has been the floor for the USDX ever since its inception in the early 1970s.
As we have often pointed out, both here and in past issues of The Privateer, the 80 level on the USDX is "THE MOST IMPORTANT 'SUPPORT POINT' IN THE WORLD". As of April 13, the USDX is down to 81.96. The index would already be much closer to that vital 80 support point if it was not for the US Dollar's startling resilience against the Japanese Yen, which makes up 13.6 percent of the USDX. Over the year to date, the $US is down 2.36 percent against the Euro (which makes up 57.6 percent of the USDX). It is down only 0.21 percent against the Yen, the second biggest component in the USDX.
Japan has, in effect, "fixed" its currency against the US Dollar this year, mainly to protect the competitiveness of its export markets in the US. In the process it has kept alive the "carry trade" in which Yen are borrowed at minuscule interest rates and used to buy other currencies (including US Dollars) which pay MUCH higher interest rates. To do this, Japan has had to make ever larger quantities of Yen available. In other words, it is inflating the Yen to a grotesque degree.
Had it not been for this process, the USDX would be much closer to the 80 level. And that would mean that the pressure on the Fed to bolster the US Dollar - with higher interest rates amongst other methods - would be much more intense. It would also mean that the pressure on the US government to start reining in their deficit spending - notably their deficit spending to continue to finance their occupations in the Middle East - would be much higher.
In the face of all this, the fact that the $US price of Gold (and Silver) has been rising for the past six weeks is hardly surprising. What IS surprising, if due consideration is not given to the global global strategic, political and financial issues involved, is that Gold is still rising so slowly in US Dollar terms.
Another week of $US Gold price rises next week will see new 2007 highs set in the metal. From the $US 687.20 2007 high to the $US 721.50 bull market high (set in May 2006) is not a big leap. It's only $US 34.30 or 5.0 percent. For the US Dollar, a drop to the CRUCIAL 80 level on the USDX would require a fall of only 2.35 percent from its present level. The pressure is rising daily, and the "cushion" enjoyed by the global financial system is getting very small indeed, as the above numbers show.
Yep, as stated in our headline this week, we're "nearly there". Here are the numbers to watch out for:
Update: Monday, April 16:
Gold spot future close was $US 690.10. This is an eleven month high and a new high for 2007.