Take a look at the gold trading statistics for the week above. Two big volume days, two down days, no change at all in open interest. Gold closed last week at $US 264.90. It actually spiked $US 2.10 on Monday (the day before the Band of England Gold auction) and then gave it all back by Thursday. On Friday, we saw the biggest daily volume for many months, and spot future Gold lost $US 1.90 to $US 26.90, breaking down through its 2000 and 2001 lows in the process. It would seem that the Gold "shorts" are piling in again.
The whole world, and Wall Street in particular, is expecting the second U.S. rate cut of January 2001 when the FOMC finishes their two-day meeting on January 31. The Nasdaq, up more than 12% so far this year, has certainly "discounted" one, as has the Dow, although the Dow is still showing a small loss on the year so far. Last time this happened, in late 1998, it took three rate cuts (in seven weeks) to reassure everyone that everything was under control and get the U.S. markets heading in the "right" direction - UP - again.
The problem now is that the Dow stopped going "up" in March/April 1999 and has been tracing a HUGE "top formation" between 10000-11000 ever since. The Nasdaq is a little different, it went to heaven in late 1999-early 2000 and then crashed like the proverbial rock.
The 1998 rate cuts certainly reignited economic "growth" - consumers resumed borrowing with a vengeance. Will the same thing happen this time? Here's one piece of evidence that it might not. So far this month, U.S. mortgage re-financing has taken off. Normally, people looking to refinance debt and anticipating future interest rate cuts will hold off on refinancing until they can get the lowest rates possible. BUT, if those same people need money NOW, for whatever purpose, they will take advantage of any rate cut right away, even if they expect more to follow. That is what's happening in the U.S. right now.
The first rate cut - on Jan. 3 - did no more than stabilise U.S. stock markets and the Dollar itself. Both the markets and the Dollar had been falling precipitously in November/December 2000. We shall soon find out what this next one will do. In this context, The Privateer does not think that the Fed would dare NOT cut rates on Jan. 30/31. They know that U.S. markets have already built another cut into their recent trading.
But what no-one knows yet is whether or not the U.S. is now facing a "Japan" situation, and whether or not the Fed is "pushing on a string". The level of concern that this might indeed be happening is best illustrated by the absolute refusal of the vast majority of U.S. financial and market analysts to even contemplate such a possibility, let alone talk about it. The faith is absolute. Lower rates will fix the problem, the solution is simply to keep lowering them until the problem is fixed. That is, of course, exactly what the Japanese thought in the 1990s. They know better now. The U.S., as yet, does not.
The Fed doesn't know IF lower rates will "work", and even if they do, they dont know how low rates will have to be pushed before they "work". Therefore, they are going to have to make absolutely sure that no "inflation" scares derail them from lowering rates until they do "work". And that brings us back to the Gold price, which has spent the past two months refusing to reflect the weakening U.S. Dollar, and which has now fallen to its lowest levels since late 1999.
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 are the Gold in "foreign" currency charts:
Gold in Euros
Gold in D-Marks
Gold in Aussie Dollars
This week (Jan. 22-26), Gold slid on two heavy volume days in New York to new 2001 lows. The Dollar went the other way, so Gold in "foreign" currencies has held on its gains of last week.
"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."
Gold Commentary - Jan. 19
Mr Bush has spent his first week in Office getting most of his major Appointees installed and cleaning up the mess left by the departing Clinton/Gore kindergarden students which formerly staffed the White House. He has a "State Of The Union" message to deliver to Congress in February. Meanwhile, the Fed is going to cut rates again in a few days and then watch with great interest, and trepidation, to see what will happen next.
The Gold "ellbub" is admirably reflecting this situation. Take a look at this chart from our Gold Bottoms studies. As you can see, the spot future price is right back to touch the trendline drawn through the post "Washington Agreeement" (Sept 1999) Gold lows. Regardless of where the Dollar goes, Gold in Dollar terms is very slowly sinking, thereby giving no "inflationary signals" at all to those few people left in the U.S. who bother to notice Gold at all.
And very few do, any more. What they DO notice is the state of U.S. stock markets and, if they are not Americans, the state of the U.S. Dollar. These are the things most susceptible to lower U.S. interest rates. If they go "too low" the Dollar will suffer. And if they do NOT induce another surge of borrowing, U.S. stock markets will suffer. We'll soon find out. The one thing we know for sure is that Gold trading on the futures markets has picked up greatly over the past week. Even if we didn't already know a U.S. rate cut was coming, that would tend to confirm our suspicions. Let's see what happens AFTER Jan. 31.
