We are now one month into 2001. U.S. official interest rates are now 100 basis points (1.00%) lower than they were on January 2. Yet so far, the U.S. Dollar has actually risen this year. The $US index began 2001 at 109.28. On Friday, Feb. 2, it closed at 110.30. Thus far this year, the index is up 1.02 or 0.93%. Even more surprising, the $US index has sustained this gain even though the Fed rate cuts have not yet been followed by any other major Central Bank. The only other Central Bank which has cut rates at all so far this year is the Bank of Canada, and that was a mere 0.25%. Next week, the Reserve Bank of Australia meets and a rate cut is universally expected, probably an 0.50% cut.
There should be absolutely NO doubt in the mind of anyone reading this commentary that if any OTHER Central Bank had cut rates to the extent that the Fed has so far this year, the currency of that nation's Central Bank would have gone DOWN. There are great advantages to being the purveyor of the world's RESERVE CURRENCY. Except in the greatest of emergencies, nobody flees from a RESERVE currency, no matter what the state of the economy or the height of interest rates are in the nation which provides that currency.
Now, during the past decade or so, while the U.S. economy and markets have been booming, financial "emergencies" have been a dime a dozen. Japan has had one throughout. Asia has had one since 1996. Even the U.S. has had a few - Orange County in 1995, LTCM in 1998, the Nasdaq bust in 2000, the California Utilities as this is being written. But financial "emergencies" are what the world has counted on the Fed to overcome. And so far, the world has not been disappointed. If the Fed can't fix it, nobody can. So, the faith in the Dollar remains. After all - you gotta believe! Right?
The other point is that the rest of the world has a HUGE vested (you should pardon the expression) interest in the Dollar. That's what they hold behind all their own financial systems. Any other currency can crack without affecting the Dollar greatly. No other currency can fail to be affected if the Dollar cracks. So, the Dollar can't be allowed to crack. And so far, it hasn't. But, for how much longer?
The first rate cut on Jan. 3 produced a short-term rally on U.S. markets. The second one on Jan. 31 has not really produced a rally at all. The problem is that ever since the last U.S. recession in 1991, U.S. rate cuts have been for the purpose of staving off financial "emergencies" in other nations. Now, the emergency being staved off is one in the U.S. ECONOMY ITSELF. What is happening to the U.S. now is exactly what happened to Japan eleven years ago. The Japanese couldn't "fix" their problem. The U.S. won't be able to either, not with lower interest rates anyway.
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
In financial markets, a "bubble" expands until it explodes - Japan in 1990, the Nasdaq in 2000. An "elbbub" contracts until it cannot contract any further. What we are waiting for with Gold is evidence that such a state of affairs has arrived.
One of the best examples of the "elbbub" phenomenon was Gold between 1933 and 1971, when it's "price" was held static at $US 35 per ounce against the U.S. Dollar. When the "contraction" could not be maintained any longer, the $US Gold price exploded, and the Dollar itself imploded.
If we take the present Gold price ($US 267) as being approximately the same (adjusted for "inflation") as the Gold price ($US 35) was in the late 1960s early 70s, we can see that exactly the same situation now stands. The pressure on the Dollar is increasing. The Gold price remains quiescent in Dollar terms. Just as happened at the beginning of the 1970s, something has to give.
The Gold "ellbub" reflects this situation. Take a look at this chart from our Gold Bottoms studies. As you can see, the spot future price has confirmed the trendline drawn through the post "Washington Agreeement" (Sept 1999) Gold lows. And this week, the movement in Gold has mirrored the movement in the Dollar, something that has NOT been happening since the Dollar topped out last November.
The incentive to hold down the Gold price has seldom been higher. The "justification" for the Fed's rate cuts, besides the crash stop in U.S. economic "growth", has been the absence of any measured "inflation". The item most used to demonstrate this absence of "inflation" is the $US Gold price. Imagine for a moment what would happen if the $US Gold price broke loose NOW. All of a sudden, there WOULD be evidence of "inflation", at the same time as the whole world is counting on the Fed to "fix" the situation by continuing to lower U.S. rates. It would take all of Mr Greenspan's considerable powers of obfuscation to talk his way through such a situation.
Nobody in charge of piloting the U.S. through its present financial troubles wants to see a higher Gold price. But that has been the case before (at the end of the 1960s, for example). The effort failed then, it will fail now. It is simply a question of WHEN? Not yet - stay tuned.
