Gold has now closed on a spot future basis above the $US 900 level for the first time ever. In fact, in early Asian and European trading on January 14 the spot future contract surged to almost $US 915 as rumours flew around the world that the Fed could not "afford" to wait until their January 29-30 FOMC meeting to lower rates. Here is how one currency analyst put it: "Gold surged ...on bets that the authorities will flood the global system with further liquidity to stave off a mounting debt crisis."
The only dissenting voice came from a member of the European Central Bank's executive council who had the temerity to suggest that the ever growing pressure on the US Dollar might constrain the Fed's ability and/or willingness to cut official US rates any further. Such considerations have not even registered on the Fed's radar for the best part of 20 years. They have never paid any attention to the exchange value of the US Dollar. If it was temporarily "weak", they could always depend on the rest of the world's major central banks coming to the party and bailing the Dollar, and themselves, out.
The latest indicator that the Fed cannot depend on their fellow central bankers any longer came on January 10 when both the Bank of England and the European Central Bank (ECB) met and did NOT lower interest rates. That was the catalyst for Mr Bernanke to start coming out with ever more frequent assurances to his fellow Americans that the Fed was ready, willing and able to take "substantive additional action" on US interest rates. And that, in turn, spawned the rumours on Wall Street that the Fed wasn't going to wait until the next FOMC meeting to cut official US rates some more.
This week, the US "jawboning" has gone far beyond the "usual suspects", the Fed and the US Treasury. The Democratic majority leaders in both Houses of Congress have bought in. So have all the various politicians vying for their party's Presidential nomination later this year. So has the current President, Mr Bush himeself. This is one of the few times when the call is bipartisan, all are in agreement - what the US needs is a STIMULUS PROGRAM!!
What kind of "stimulus program"? Anything and everything will do. Tax cuts, tax rebates, more unemployment benefits lasting for a longer period of time, more food stamp allowances. Remember Mr Bernanke's "helicopter money"? Here it is, though nobody would be impolite enough to actually use the term. No, all of this comes under the headline of "temporary" STIMULUS PROGRAMS.
But not just any type of "stimulus programs". Everyone is agreed on the "principle" that whatever method or methods is decided on, it should be implemented quickly, it should be sufficient(?) to the tast, it should go to people who are most likely to spend it - all of it - quickly. Oh, and it should be "temporary" too lest it hangs around long enough to be recognised for what it is - OUTRIGHT MONETARY INFLATION!
The politicians and the "authorities" can't afford to worry about mere details like that. The US economy is "on the verge" of recession and this is an ELECTION year. All hands to the pumps - and devil take the hindmost or the consequences.
Mr Bernanke of the Fed and Mr Paulson of the Treasury depend on public perception above all other things. They count on what they call inflationary EXPECTATIONS remaining under control. And they count on the currency they control, the US Dollar, to continue to be seen as a viable, if not a strong, form of MONEY.
The fact is that ever since the subprime crisis hit US and global headlines way back in August last year, both Mr Bernanke and Mr Paulson have been upping the inflationary ante with ever more vehemence: Mr Paulson's injections of "liquidity" and Mr Bernanke's rate cuts; Mr Paulson's now aborted plan to rescue the "Structured Investment Vehicles" (SIV) and Mr Bernanke's swap lines with foreign central banks; Mr Paulson's increasingly desperate travels to try to find some "co-operation" from his international counterparts and Mr Bernanke's newly implemented debt "auctions".
All of these actions do NOTHING to address the source of the problem, which is of course the impossibility of perpetuating a monetary system based on debt and nothing but debt. All of these things, in fact, make the problem worse. And none of these steps taken by either Paulson or Bernanke has been seen to alleviate the financial crisis.
Now, this week, the situation has worsened with the politicians wading into the fray. Examine the history of any nation facing economic or financial crisis. When the politicians get involved in a "headline" fashion, it is simply a matter of time before the threat of an economic and financial collapse becomes reality. The reason for this is that it is impossible to maintain a situation of "benign" inflationary expectations and confidence in the currency once it is seen by a "critical mass" of individuals that, far from addressing or "fixing" the problem, the action of the politicians is making it worse.
That is what the US now faces. And once the US powers that be in Washington DC and the establishment behind them lose control of the "expectations" of Americans, they will stand helpless in front of the crisis that they have brought about by their own actions. This has not happened in the US since the late 1970s, and that one almost destroyed the US Dollar beyond redemption.
When it happens this time, and it will, it will finish the job. We are on a one track road to a monetary revolution as it becomes clearer and clearer that an economic system based on debt cannot survive.
You cannot blow up a flat tyre without first fixing the leak which caused it to go flat. You cannot "repair" a financial system by diluting the medium of exchange on which it depends. That's what the US "authorities" propose to do. They will fail.
Here is the $US 5 x 5 point and figure chart. As you can see, the $US 20 Gold fall on Wednesday, January 16 has not turned this chart down. For that, Gold would have to close on a spot future basis at $US 875 or lower.
(Chart appears here in original analysis)
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 last week led to bull market highs in all four currencies - as seen on this table. Gold's breaching the $US 900 level this week led to yet more new highs in all of them - except the Yen.
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