Yes we know that the spot future Gold close for September 7 was $US 703.20. Yes we know that the bull market high spot future close remains $US 721.50 set way back on May 11, 2006. Nonetheless, we have a new high for Gold this week - as measured against the "trade weighted" US Dollar index, or USDX.
For Privateer and Gold This Week (GTW) subscribers, we run a daily series of charts which show the ratio between the $US Gold price and the USDX. This ratio is derived simply by dividing the spot future Gold price close by the spot future close on the USXD and multiplying the result by 100.
Thus, on September 7, 2007 spot future Gold closed at $US 703.20 while the USDX closed at 79.91. Dividing the first number by the second gives a result of 8.79989. Multiplying this by 100 gives a ratio for our purposes of 879.99
Now, here's a point and figure chart of the $US Gold/USDX ratio going back to the beginning of 2006. Up until this week, the highest point on this chart in the post 2001 Gold bull market was the level set on May 11, 2006 - the day when spot future Gold set the bull market high which it is now approaching once more. That level is shown by the red dotted line on the chart. As you can see, that level has been exceeded by a considerable margin this week on a combination of plus $US 700 Gold for the first time since May 2006 AND a USDX which slumped to a fifteen-year low on September 7. Please note also that the USDX closed below the 80 level on September 7 for a second time this year, the first time being on July 24.
The $US Gold/USDX Ratio:
Now, take a look at the last upmove, the vertical line of "Xs" at the right of the chart. That upmove began on August 17, the day after the first panic rush out of commercial paper of all descriptions into Treasury paper brought about a HUGE global stock market sell-off and a $US 20 fall in the spot future $US Gold price. Do you remember what else happened on August 17? That's right, it was the day when Mr Bernanke and the Fed buckled at the knees and sprung a "suprise" rate cut, knocking 0.50 percent off the Discount Rate. Ever since, the $US Gold/USDX ratio has gone straight UP.
This week, of course, the rise of the ratio hugely accelerated. The main contribution to this advance was made by the $US Gold price which was up 4.05 percent on the week. The USDX, on the other hand, was down 1.03 percent with more than half that fall coming on September 7 on the news that the US economy had actually LOST jobs in August - for the first time since 2003.
If you are at all interested in what is going on in the world of finance and money, you will have been inundated this week with reports on the "credit crisis". It is not a "credit" crisis, of course, it is a DEBT crisis. It is a mushrooming slide into collapse by the underpinnings of the entire global financial and MONETARY system, the so called "assets" on which it rests. These "assets" - from the CDOs and SIVs and the mortgages and the "asset backed commercial paper" to the government debt paper to the actual CASH itself (US/Can/Aus/NZ Dollars, Euros, Yen, Pounds, Yuans and all the rest) are in reality nothing more or less than IOUs.
Now, look at what has been done by the Central Banks around the world to meet this crisis. All of them have injected MASSES of "liquidity" into their respective systems. This has not worked. Most of them have widened the types of debt paper which they will accept for "rediscount". But so far, only one Central Bank - the US Central Bank - has lowered the rate at which they will rediscount this paper.
And the other major Central Bank rate the "controlling rate" - the Fed Funds rate in the US for example - the rate at which the Central Bank lends "excess reserves" deposited with them by the commercial banks? Well, nobody has cut this rate yet. This week, the Central Bank of Sweden actually RAISED theirs - by 0.25 percent to 3.75 percent. The ECB refrained from raising their rate this week but let it be known that they intend to resume rate rises "once financial market turbulence has abated."
Again, there is one Central Bank which is universally expected to start LOWERING their "controlling rate". And again, that Central Bank is the US Fed. Once the Fed took the first step and lowered their Discount Rate on August 17, it was instantly seen as a SURE THING that they would go on to lower the Fed Funds rate on or BEFORE September 18, the next scheduled meeting date for the Federal Open Market Committee (FOMC). The only item of contention is HOW MUCH will the Fed lower, will it be 0.25 percent or 0.50 percent. Some commentators, like Mr Martin Feldstein, have suggest that the Fed really needs to lower their Funds rate by a full 1.00 percent at the September 18 meeting.
Of course, lowering the Fed Funds rate is held to be the panacea, the infallible "cure" for any level of credit "contraction" from whatever source derived. If this were not true - in the eyes of the monetary powers that be - then the Fed would be powerless to "control" the economy at all. The Fed is the "lender of last resort", after all. What is there left to resort to if people cannot be enticed into borrowing no matter how much the interest rate is lowered?
And here we have the great irony of a debt-backed monetary system exposed as starkly as the emperor in his brand new clothes. The last time that the global financial system was in the kind of "fix" it presently faces was at the end of the 1970s when price inflation was rampant and the US Dollar was threatening to go into terminal free fall. Back then, the problem was "solved" (in reality, its effects were postponed for 27 years) by Paul Volcker backing away and letting US rates be set by the markets. Of course US interest rates - all US interest rates, even the rates on Treasury debt paper - soared.
Today, the Fed has lost control of rates in the markets for commercial debt. Rates are being forced inexorably higher all over the world just as they were at the end of the 1970s. Gold is pushing higher and the US Dollar is sliding lower just as they were at the end of the 1970s. The US Dollar is sliding with increasing rapidity just as it was at the end of the 1970s. The major difference is in the attitude towards government debt paper. At the end of the 1970s, it was shunned by the markets. Now, it is the only form of debt paper which everybody runs to for "shelter from the storm".
Of course, it is unimaginable to the paper pushers that Mr Bernanke would ever emulate his successor Paul Volcker and choose to renounce (for a while) Fed control of interest rates as a means of diffusing the current crisis. Such a course of action would instantly drop the US and the world into a vastly worse recession than the one the world suffered through between 1979 and 1983.
So the betting is that the Bernanke Fed will ride to the rescue on the back of lower official US rates. The implications this has for the future exchange value and purchasing power of the US Dollar are being studiously ignored - in the realm of the paper pushers. Out in the wider world, however, it is not, hence Gold's BIG rise this week and hence the new bull market high on the $US Gold/USDX ratio.
It was the cutting of the Fed's Discount Rate which set off the rise in this ratio. It is the worsening of the "credit crisis" this week which has accelerated it. A Fed Funds rate cut, especially if the Fed decides it cannot wait until September 18, has the potential to accelerate it still further. It has the potential to do something else too. It has the potential to alert a lot more people to the fact that government debt paper is in fact less worthy of their "full faith and credit" than is any other type of "financial asset". That's what happened at the end of the 1970s and that's why the Gold price soared. That's what is going to happen again, only this time, there will be no "rescue act" of the type performed by Mr Volcker in late 1979. It is deemed "politically impossible" - they can and they will PRINT before they resort to any such idea.
Please note the new 2007 high on the $US Gold price in this table
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