January, the month when global stock markets turned turtle and panicked the Fed into knocking 1.25 percent off their controlling interest rates in a week, is over. According to several news stories recently read, it was the best month for $US Gold since April 2006. Over the month, December 31, 2007 to January 31, 2008, Gold rose from $US 838.00 to $US 922.70, a rise of $84.70 or 10.1 percent. In April 2006, the rise was from $US 581.80 to $US 654.50. That's up $72.70 or 12.5 percent.
On the paper markets, specifically the stock markets, the old adage goes like this: "As January goes, so goes the year". On the surface, the HUGE rise in the Gold price in January 1980 compared with its performance for the year as a whole might tend to pour cold water on that. But please consider that Gold did rise from $US 512 to $US 593 (or by 15.8 percent) in 1980 as a whole.
On top of that, please consider the situation in 1980. It was the end of a decade of ever CLIMBING US interest rates brought on by a decade of ever climbing US consumer prices. In 1980, US bank rates hit 20 percent and then stayed there for the most of the next two years, plunging the nation into what is still its worst "recession" since the 1930s. The problem for the US paper markets in the decade leading up to 1980 was that the inflation which was going on - and there was lots of it - was being reflected in the prices of consumer and capital goods and in precious metals.
Of course, the level of monetary inflation which has been inflicted on the US - and everywhere else - over the past ten years makes what happened in the "inflationary 1970s" pale into total insignificance. The huge difference between the two eras is that whereas in the 1970s, the new money being created went into economic goods, over the past decade (indeed ever since the end of the 1980-82 recession), it has been going into paper assets of all descriptions.
The problem, for the money manipulators and for the paper markets alike, is that this era is now OVER. There is no doubt that "money" is still being force fed into the system, most particularly in the US. But this "money" is NOT going where it has been going since the early 1980s. It is not going into leveraged paper investments. It is going into the purchase of goods, including precious metals. And because this is the route it is taking, country after country is now reporting its highest levels of "inflation" for years if not decades. The inflation has not changed, what HAS changed is the area where the price rises caused by the inflation are occurring.
In his excellent Credit Bubble Bulletin this week, Doug Nolan quotes Mr Ricardo Hausmann writing in the UK Financial Times on January 31, 2008:
"The same voices that supported tough macroeconomic policies to deal with the excesses of spending and borrowing in east Asia, Russia and Latin America are today pushing for a significant relaxation in the US to deal with the so-called subprime crisis. Interest rates should be slashed quickly and $150bn put into taxpayers’ pockets by April at the latest, they say. The goal seems to be to avoid a 2008 recession at all costs. As Larry Summers, former Treasury secretary, put it, failure to act would make Main Street pay for the sins of Wall Street."
What Mr Summers knows but is not about to say in public is that Main Street HAS been paying for the "sins of Wall Street" for decades. But be that as it may, the point made by Mr Hausmann in this quote is a good one. The US controlled IMF has "presided" over financial and monetary crises affecting almost every nation on earth over the past two decades or so. The "formula" presented to the afflicted government was always the same. Cut spending, raise interest rates, balance budgets, take the downturn. Now, it is the turn of the US government. And what is THEIR formula? RAISE spending, CUT interest rates, BLOW OUT budgets, AVOID the downturn. After all, it is an election year.
The final icing on the cake is this. In all the bailouts of all the financial crises in all the world for decades past, the one thing which the IMF would never have contemplated in its wildest dreams is countenancing negative REAL controlling interest rates in the nation or nations to which they were laying down the law. Even on an OFFICIAL level, the US now has a such a negative REAL rate. According to the US government's own figures, the latest year on year "inflation" measure is 4.1 percent. The latest Fed Funds rate - as of January 30, 2008, is 3.00 percent. This is pure unadulterated economic insanity. And Wall Street loves it.
Not only do the monetary powers that be refuse to recognise the REAL situation, they are doing everything they can think of to make the situation worse. If you flood a nation with new "liquidity" while nobody in that nation wants to lend or borrow anymore, that new "liquidity" will inexorably force up the prices of the things that people MUST buy in ANY economic circumstances. That means REAL goods, from the classic necessities of food, shelter, and clothing at first and ultimately to any form of tangible economic good which is keeping or even improving its purchasing power. This is where the classic demand for precious metals comes in. Not claims to the metals or paper assets of any nature which are "based" on the metals but the metals themselves.
That is of course what happened in the 1970s. It is also what is now STARTING to happen again. We say only starting because what has taken place so far, the rise of Gold from just below $US 260 in April 2001 to its present levels above $US 900, has merely made up for the two plus decades during which an unprecedented level of monetary inflation was directed almost solely into paper assets NOT based on real economic activity but on an artificially boosted propensity to lend and borrow.
The desperate measures by the Fed in flooding the system with "liquidity", inaugurating new debt "auctions", and now taking a meat cleaver to official US rates, are all being done in a desperate attempt to perpetuate the lending and borrowing. There are two certainties as the year progresses. The first is that even more desperate measures will be resorted to, as and when deemed "required". The second is that not only will none of them "work", it is that each one will make the final collapse that much worse than it would otherwise have been.
Gold fell $US 14.00 on the first day of February, a reaction broadly attributed to a "surge" in the $US. In fact, the US Dollar was merely regaining some of the ground it had lost two days previously in reaction to the Fed's second rate cut in a week. Other "analysts" put it down to the January US employment report which showed 17,000 jobs LESS than the month before. This hasn't happened in four years, and any monthly REDUCTION in US jobs is almost always an infallible red light warning of recession. No matter, Wall Street merely took it as one more confirmation that the Fed will go right on lowering rates at (or maybe before?) the next scheduled FOMC meeting on March 18. And then there was the story that it was simply profit taking in Gold after the best monthly performance for nearly two years.
For the month of January, Gold rose 10.1 percent. For the year of 2008? Impossible to say. What we know is that in the US, the desperate measures to "reflate" a system with a huge hole where the paper markets used to be will continue and intensify. WE know it won't work. If it becomes obvious to enough other people this year, then LOOK OUT ABOVE.
Here is the $US 5 x 5 Gold point and figure chart:
(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 three weeks ago led to bull market highs in all four currencies. This week again, Gold hit an all time high in $US terms on Monday, January 28. As you can see, that was reflected in bull market highs in the other three currencies in the table on the same day.
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