After almost exactly 28 years, Gold in US Dollar terms has this week risen to new all time highs. Last week, we pointed out that Gold's all time high in spot future closing terms was $US 873.20, the level it reached on January 21, 1980. On January 8, 2008, spot future Gold closed at $US 880.30. By the end of this week on January 11 spot future Gold had risen further to close at $US 897.70, having also moved above the $US 900 level in intraday trading for the first time ever,
Here is the $US 5 x 5 point and figure chart we posted here last Friday. As you can clearly see, Gold in $US terms has now risen decisively above ALL previous levels of resistance.
(Chart appears here in original analysis)
"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."
The above paragraph is, of course, the last paragraph to the introduction to this page. That introduction was written in 1995 and not one word of it has ever been changed. When we wrote it, we had no way of knowing WHEN the belief in the debt on which the global paper currency system is based would prove insupportable. We knew that the time would inevitably come, however, and we knew what the most telling indicator that the time HAD come would be. Here it is. Not only do we have a "sharp rise" in the $US Gold price, we have a rise which has taken it to levels never before reached.
One cannot flout economic laws with impunity. The inevitable end result is always economic collapse. True, the "inevitable" sometimes takes a while, even a LONG while, but the end result is nonetheless inevitable. No system of "money" created by fiat and force fed into the "system" by means of "legal tender" laws and fractional reserve banking has EVER lasted. All have collapsed, history shows no exception.
Given the fact that today, the fiat paper money system is GLOBAL, the collapse of its "collateral foundation" is not going to be a pretty sight. It's easy to see this, merely by taking a look at what has happened to global paper markets since the beginning of 2008. It is even easier to see it by considering the increasingly desperate "reassurances" now pouring forth from the US Fed and the Treasury.
In the "real" world, the cost of issuing yet more debt paper is now reaching totally unsupportable levels. Countrywide, the biggest mortgage lender in the US, was effectively taken over by the Bank of America this week. It was that or declare bankruptcy. On January 9, the day before Countrywide shares soared on rumours of this takeover, the cost of "insuring" against default on its five-year debt paper had soared 469 basis points to more than sixteen percent. A year ago, the cost of such insurance was 0.30 percent.
Similar huge increases in REAL WORLD interest rates (as opposed to those set officially by central banks) have been popping up all over the world with increasing frequency. But the consequences of the credit excesses are most acute in the nation where those credit excesses were the highest, the USA. Worse still, the rest of the world is no longer willing to play along with the desperate need of the Fed to re-ignite the credit expansion. This week, both the European Central Bank (ECB) and the Bank of England (BoE) had their version of FOMC meetings. Both central banks did NOT lower their rates, they held them steady. The immediate result was a 0.46 point drop in the $US Index (USDX) and a surge in the $US price of precious metals.
To make matters worse, on the same day, Fed Chairman Bernanke was quoted as follows: "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.". Had either the ECB or the BoE lowered their official rates on January 10, the Fed probably would have followed suit even though they would have been acting OUTSIDE the regular FOMC schedule. As things stood, the Fed didn't dare.
But the problem now for the Fed is that the entire paper edifice which are the US financial markets have already priced in at least a 0.25 percent cut, and more likely a 0.50 percent cut, when the FOMC does officially meet for the first time in 2008 on January 29-30. What neither the Fed nor Wall Street dares to talk about is the obvious fact that if the banks won't lend and their "customers" can't or won't borrow, then the Fed is powerless. Worse, the growing suspension of "belief" in the credit money system they have created is working against them. As this disbelief grows, and it will, they will make matters worse every time they utter what they hope is a "reassurance". And they risk turning the situation into chaos if they go on lowering official US rates.
THE signal of all this is the soaring $US Gold price, which has actually risen by almost $US 100 since December 20, less than a month ago. As long as the $US Gold price had not reached new highs, the fiction of the "barbarous relic" could be maintained. After all, Gold had been higher before, and the paper money system had not become unstuck, had it?
But now, as evidence grows by the day that the paper money system IS becoming unstuck, Gold has finally breached its previous high point in US Dollar terms. That, all by itself, signals the BEGINNING of the end for the global fiat money system. It is not a coincidence that a January 6 headline in the UK Telegraph newspaper read" "Flight to Gold as investors lose faith in money".
That may be premature, but it is coming. What investors HAVE lost faith in is the viability of more and more categories of debt paper denominated in (paper) "money". From there to a questioning of the viability of the money itself is not a long step. And it has come a giant step closer this week with the new all time high on the $US Gold price.
We have extended the table below into 2008, even though Gold in all four currencies in the table is now well above its 2006 highs. Gold breaking out to new all time highs in $US terms this week has led to bull market highs in all four currencies - as seen on this table.
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