Gold in US Dollar terms fell this week, the first such weekly fall in the past eight weeks. It certainly didn't fall as a result of a sudden "turnaround" of the US Dollar. The USDX hit fresh two and a half year lows on April 25 and closed the week at 81.35, just 0.10 above the lows it had set two days earlier. The fall of the US Dollar is certainly slowing, but that is to be expected. The USDX is now less than one point above the multi-year lows it set at the end of 2004 and less than one and a half points above the critical 80 level, a level it has NEVER been below for more than a few days since the USDX was established in 1973.
On Wall Street, the stock indexes just keep on rising. The US Treasury has recently been inundated with the biggest corporate tax take in its history. This has certainly not been coming from the manufacturing sector. It has, overwhelmingly, been coming from the financial sector where an asset pile in the multi $US TRILLIONS has been piled on top of a faltering currency and a comatose "bricks and mortar" economy.
How long this can be maintained in the face of the faltering currency and the financial rot in the US real estate financing sector is going to prove one of the BIG questions of the rest of this year.
Still, this week was Gold's first "losing" week in the past eight weeks, and the US Dollar has only been plumbing new 52 week lows for the past two weeks or so.
So far, the US financial markets and the financial pundits and analysts have been remarkably successful in deflecting attention from the crumbling of the US economy and the US Dollar while lauding the gains made by the fantastic levels of leverage being employed by the banks, the hedge funds, the derivative manipulators and all the rest. But on Friday, April 26, a sober dose of reality was thrown into the ring, courtesy of the US Department of Commerce.
On Friday, they reported the US economic "growth" figure for the first quarter of 2007. The number came in at 1.3 percent, WELL below market "expectations" and the lowest such quarterly growth figure since the first quarter of 2003. The first quarter of 2003, you might remember, was the LAST calendar quarter before the Bush Administration embarked on their invastion and occupation of Iraq (and Afghanistan). IN the two months between mid January and mid March 2003, the Dow plunged from 8840 to 7524 and the US Dollar was sliding right along with it.
One of the reasons why the Bush Administration went into Iraq, just as had a previous Bush Administration in 1991 was as a distraction from the distastrous state of the US economy. It worked in 1991. It worked in 2003 as well.
The significance of the year 1991 came later on in the Commerce Department report when they stated that their price index over the first quarter of 2007 rose at an annual rate of 4.0 percent. This was up from the 1.7 rate recorded in the fourth quarter of 2006 and the biggest such rise since - that's right - 1991. Remember 1991? That was a recession year all over the world. And in 1991, the US Fed Funds rate was 8.50 percent.
At present, official quarterly US economic growth is 1.3 percent. The US still releases an official M-2 figure, which is increasing at a 7.8 percent annualised rate. The Fed got rid of their "Broad Money - or M-3" figure over a year ago. Unofficial estimates put the annualised growth of M-3 at over 10.0 percent. In essence, new US Dollars are being borrowed into existence at a staggering rate, yet the "kindest" estimate of US economic "growth", the official one put out by the US Commerce Department, can only show a figure of 1.3 percent. In reality, this is recession with a vengeance.
In "normal" circumstances, the hue and cry for the Fed to start CUTTING official US interest rates would have long since been intense. This anaemic "growth" report would raise it to deafening levels. Yet there is hardly a peep out of Wall Street. They know, although they would never acknowledge it, that the US Dollar is hanging on by its teeth and toenails. Any reduction in official US rates would be a highly likely catalyst for the USDX to sink below the 80 level which has been its floor ever since the "floating currency" era began in 1973.
And were THAT to happen, any further pretense that the US Dollar still filled the role of a global RESERVE currency would become impossible to maintain. Without that reserve currency status, the US would have to pay for its imports with exports - of REAL goods. This it is literally not in a position to do. The result would be an implosion of the trade deficit caused by an implosion of consumer borrowing, that same consumer borrowing which makes up (at least) 70 percent of US economic "growth". The final result would be a US economic, and financial, implosion.
Every time the spectre of such an implosion raises its head, the knee jerk reaction (amongst many others) is to "hit" the $US Gold price. This week was a (so far) mild example of that. The major Gold price falls, on April 24 and 26, took place almost in their entirety in New York trading, most of it after all other markets had closed for the day.
But the financial markets, in the US and elsewhere, have yet to digest the implications of this anaemic first quarter US economic "growth" figure. The wall of mis-perception between the true state of the US economy and the performance of US financial markets, notably US stock markets, has just sustained another "hit". There is no telling which one will finally cause it to crumble, but crumble it will.
As we stated here last week, these are the numbers to watch out for:
With $US Gold setting a new 2007 high this week, only three numbers remain
Here is Gold in four major currencies in relation to its bull market high. As you can see, the 2006 high in Japanese Yen has been bettered this year.
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