The G-7 meeting of Finance Ministers and Central Bankers in Washington DC took place on October 19. At 6PM EST - the communique was released.
Here it is: Statement of G-7 Finance Ministers and Central Bank Governors
And here's a statement from the US Treasurer: Statement by Treasury Secretary Henry M. Paulson Jr.
The US Dollar was not mentioned once in either statement. Neither was the Euro nor the Yen. The Chinese currency was mentioned in passing as China was praised for its "decision to increase the flexibility of its currency" but urged to "allow an accelerated appreciation of its effective exchange rate." And, of course, the G-7 participants would rather strip naked and parade around the Washington Monument at high noon than breathe the word "Gold".
In the leadup to this meeting, the financial press all over the world (even in the US itself) was full of articles talking about the determination of the European members of the G-7 and the Japanese to make strenuous overtures to the US to "do something" about its "twin deficits" and its profligate credit creation practices. No doubt such overtures were made, behind closed doors. No hint of them made it into print in the communique.
In fact, no hint of anything germane to the ACTUAL situation affecting the global financial system was made in the communique. A lot of it was taken up with reports on progress towards IMF and World Bank "reform". Both of these post war institutions are now irrelevant, and the G-7 knows this full well, but they had to talk about something.
Meanwhile, back in the markets which the G-7 are "monitoring closely" it was a very bad week indeed. As you know, US stock markets suffered a mini-repeat of the chaos generated exactly 20 years previously on October 19. Some reports had the temerity to call it a "crash" although the major US indices were only down about 2.6 percent on the day. On October 19, 1987, the Dow plummeted by well over 20 percent on the day.
On top of that, the $US oil price briefly traded above the $US 90.00 level on the day before falling back slightly at the close. The active spot future (December) Gold futures contract traded above $US 770 on the day before it fell back too and closed almost unchanged from the previous day. US Treasury yields plummeted again on October 19, as they had done for the previous three days. Since last Monday, October 15, the yield on three-month Treasury paper has fallen 44 basis points with the yield on two and ten-year paper falling 44 and 30 basis points respectively. As more than one bond trader put it - "FEAR IS BACK!". In an accelerating rush, investors are once again abandoning almost all other US markets in favour of the "safety" of Treasury debt paper.
The difference this time, at least so far, is that the rush into Treasuries has had no impact on $US Gold prices, which have continued to rise. Admittedly, they have not perhaps risen as far as they would have in the absence of plummeting Treasury yields. Gold rose markedly in $US terms this week. It did not rise anything like as much in terms of most other major currencies.
And here's a final point to ponder. In an October 18 analysis from Reuters entitled: Markets see US policy of "ignore the dollar", Mr Kevin Plumberg makes the very salient point that the two-term Bush Administration may be the first since "the gold standard was dropped in 1971" not to intervene in the currency market.
Mr Plumberg goes on to point out the increasing fatuousness of Mr Paulson's and the US Treasury's "strong Dollar policy" - unless the meaning of "strong" is changed. What if instead of indicating a stable or rising exchange rate on the international financial markets, a "strong dollar" referred to the US Dollar's continuing role as a "reserve currency"? It is an absolute certainty, after all, that the US Treasury - not to mention the Fed, the Bush Administration, the entire US Federal government and the US banking system - will fight to the last printing press to preserve the reserve currency status of the US Dollar. Without that status, the US Dollar would have become extinct long since.
The Bush Administration has not intervened in the currency markets. They have not had to. The rest of the world has done it for them by recycling their ever growing trade and current account surpluses with the US back into Dollars, Treasury paper, and Dollar-denominated "assets" of all descriptions. As the Late October issue of The Privateer (Number 589 - published on October 21) shows using official US figures, this appetite for $US assets was abruptly terminated in August with a turnaround from investment to "disinvestment" of breathtaking proportions.
The G-7 communique doesn't talk about this either. Instead they talk about the necessity of China letting its currency rise against its major trading partners. Of course, the Chinese could do this anytime they chose, simply by ceasing their buying of US financial assets with the Dollars they earn by exporting to the US. The G-7 knows this too, and according to the official August figures, the Chinese, and most of the rest of Asia, has begun to do just that.
The Bush Administration wants the US Dollar to retain its status as the world's major reserve currency, which it reserves only by "grace" of the massive foreign buying of US Dollars. At the same time, they want the Chinese to let their currency appreciate. The problem (and US markets are making this clear for anyone who has eyes to see) is that they can't have it both ways. The days of US Treasurers stating to the world that "It's our currency but it's your problem" are long gone. And now, the US Dollar is going too - in its exchange value AND, ultimately, in its status as THE global reserve currency.
This week, the spot future $US Gold price broke above the $US 760 level. In doing so, it established a huge "breakaway gap" on the strategic $US 5 x 3 Gold chart. This is final confirmation that the next upleg of the post 2002 Gold bull market has been established. The only resistance point left is the all time high close of $US 850. The only question left is will Gold get there this year, or will it have to wait until 2008?
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