"The global paper currency system is very young. It depends for its continued functioning on the BELIEF that the debt upon which it is based will, someday, be repaid. The one thing, above all others, that could shake that faith, and therefore the foundations of the modern financial system itself, is a rise (especially a sharp rise) in the U.S. Dollar price of Gold."
If the above quoted paragraph seems familiar, it should. It's the last paragraph of our introduction to this page - see above. That introduction was first written when we first posted this page in late 1995 and has remained unchanged since.
For the third time since the current $US Gold bull market began back in early 2002, we are seeing a sharp rise in the $US price of Gold. The first time was in late 2004 - early 2005 when the $US was falling dramatically and was threatening its lows on the USDX. The second time was in April/May 2006 when the Fed was nearing the end of a two-year series of 0.25 percent rate rises. The third and current instance started in late August and is still going strong after the first full week of November 2007.
Here's the $US 5 x 5 Point and Figure Gold chart updated to November 9:
On August 16, just under three months ago, the spot future Gold price closed at $US 648.30. The next day, Friday August 17, the US Fed sprung a surprise rate cut, slashing 0.50 percent off its discount rate. Ever since then (see the long vertical line of "Xs" at the right of the chart), Gold has gone straight up on this chart with never a downturn. At its $US 837.50 close on November 8, the rise has been just under $US 190 or about 30 percent. That's a BIG move.
Too big - for many Gold analysts. As Gold approached and then exceeded $US 800, more and more of them have been warning of Gold's "overbought" condition and warning that a correction is waiting in the wings and that when it hit, it would be a doozy. The implication is, of course, that "they" will get on top of Gold again and that "THEY" are setting up all the poor punters one more time for a skinning.
There's no question that this is what "they" want to do. Indeed, the financial and monetary powers that be are undoubtedly getting very uncomfortable watching Gold bouncing its head off the all time high over the past week. But their REAL problem right now is with their own system, specifically the stature, or lack of same, of their "reserve currency" the US Dollar. On top of that, the world's commercial banking system is unravelling at the seams. Last week, the CEOs of two of the main New York money centre banks resigned. On November 9, with the memory of the first full-fledged British bank run in more than 100 years fresh in their memories, investors on the UK stock exchange pushed the shares of Barclays Plc, Britain's third biggest bank, down 9.1 percent. So bad was the rout that Barclays was suspended from trading on the day.
The fact is that the structure of the debt based fiat floating currency system that was brought into being in the aftermath of President Nixon closing the "gold window" in 1971 is collapsing right in front of our eyes. The reason for this is, as The Privateer has analysed on many recent occasions, that the collateral foundation which holds up the "assets" (read debts) of the banking system is crumbling. The prices of assets which can be priced, like real estate, is crumbing in both the US and the UK. The huge structure of debt paper or "derivatives" which has been erected on top of this "foundation" has never been valued on any kind of open market. Instead, the "value" of this paper has been derived from complex mathematical equations. This is what brought HTCM undone in 1998, when the "models" proved to have no connection with the reality of the marketplace. But what was a single issue in 1998 is now, nine years later, a systemic calamity.
But to REALLY measure how bad the situation has become, we need only look to the latest statements made by the US Treasury Secretary and the Chairman of the US Fed.
On November 9, Treasury Secretary Paulson saw fit to "defend" the US Dollar's global reserve currency status. He said this: "The dollar has been the world's reserve currency since World War II and it's been that for a reason. We are the biggest economy in the world, we are as open as any economy to investment, to trade and we've had stable economic policies." I have no doubt that looking out over any reasonable period of time, you're going to see our strong economic fundamentals in this country shine through."
This kind of thing simply won't fly anymore. In terms of the production of anything except (debt based) "money", the US is no longer the biggest economy in the world. The US is open to investment alright, as long as what the rest of the world wants to buy is debt instruments denominated in US Dollars. And as to stable economic policies, the US has those too. They consist of spending beyond one's means and relying on the rest of the world to continue to mop up the debt paper created in the process.
The REALLY ominous aspect of all this, however, is that Mr Paulson saw it as necessary to defend the US Dollar's reserve currency status. If that status was sound, what need is there to "defend" it?
Meanwhile, during testimony at a Congressional hearing, Fed Chairman Bernanke let loose with this: "We're going to make sure that the inflationary impact which may come from the weakening dollar is not passed into broader prices." How this is to be accomplished Mr Bernanke did not see fit to relate. What he is clearly trying to do here is to try to reassure the American people that a weakening Dollar will NOT result in higher consumer prices. The problem, for Mr Bernanke, is that it already has.
If Mr Bernanke REALLY wants to control US prices, there is no means available short of full on wage and price controls available to him. Isn't it ironic that when President Nixon decreed that the US Dollar no longer had any connection to Gold in 1971, wage and price controls were brought in at the same time?
The debt-based global currency system is not in "extremis" yet, but it is getting perilously close. And Gold, while its $US price rise is accelerating, is STILL below the all time highs set 28 years ago. How many other commodities can be bought today for less than they could be bought in January 1980?
Is there a "correction" in the wings for the $US Gold price? Of course there is. The only question is will it come here or will it come at a price above the highs set in 1980. Either way, a "correction" in a bull market is a quite normal event. The one thing we are as certain of as we can be about anything which has not yet happened is this. Given the unravelling of the present global financial system which is now impacting currencies themselves, Gold in terms of US Dollars (and all other global paper currencies) has a long way to go yet.
Please note that Gold has now exceeded its 2006 highs in terms of three of the four currencies in the table below and is on the verge of doing so on the fourth one, the Australian Dollar. This may happen VERY soon due to the rapid acceleration in the unravelling of the Japanese Yen "carry trade" this week. As one of the major beneficiaries of this "carry trade", the Aussie Dollar will have a major "prop" knocked out if the Yen continues to appreciate against the US Dollar.
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