Your intrepid author starts his day by updating his website, a procedure which has now become a pretty routine one. Living in Australia, he is getting up just as the U.S. markets are closing for the day. Well, this morning (June 3 in Australia), he had a pleasant surprise.
First, it was off to get the Treasury bond yields for the charts at the Subscribers Pages. Ah-ha! Three month T-Bill yields up 16 basis points. Bet the U.S. markets had a screamer. Then, it's off to see the U.S. stock market data for the charts page.. Yup, Nasdaq up 230 and the Dow up 142. Must have been some news of an economic slowdown in the U.S. somewhere. Then, it's off to check the news for the News page. Sure enough, it looks like employment might have peaked.
Now, taken in isolation, all this information makes perfect sense. Investors in the U.S. have been latching onto every statistic of a slowdown in U.S. economic growth as another reason why the Fed won't be so nasty with U.S. interest rates. On Friday, they REALLY got the bit between their teeth, hauling the money they had parked in "cash" only last week back out of Treasuries and diving head first back into the dot coms. This is all that matters to U.S. investors, any evidence that the pressure on U.S. rates might be coming off is all they need.
"In the final analysis, the present level of Gold against the U.S. Dollar cannot be maintained indefinitely, especially if the Dollar continues to fall in coming weeks. It is much too early to call the Gold close of $US 270.70 on May 25 a "bottom". All we can say is that it was certainly a selling climax, and that the Dollar fell - precipitously - the very next day."
(Posted here on May 26)
Our next port of call was to take a look at the Dollar index, which we also post at the Subscribers' Pages. Off almost a full point to 108.04, a six week low! Oh-oh! Obviously, the U.S. investors piling back into the Nasdaq and the Dow don't see this as any kind of a problem. Let's see if anyone else does. And so, finally, it was off to check the Precious Metals. Spot future Gold UP $US 8.90 to $US 281.40! BINGO!
Eureka! The economy is slowing down. Let's by stocks! There was a time, in the distant past, when a reaction like this would earn one a night in a padded cell with all sharp instruments and belts and shoelaces firmly sequestered beyond one's grasp. But that was in the distant past. Nowadays, it is the perceived wisdom of the marketplace. And few will argue, after all, the Nasdaq rose a stunning 18.9% this week (in only FOUR trading days). That is its best week ever, by a very long way indeed.
If one has financial tunnel vision, it's easy to succumb to this way of thinking. Any slowdown in economic activity is good, because it means that the pressure for higher rates is eased. And if interest rates don't go up any more, then there is nothing to stop the stock market from going on another upside rampage. After all, it ALWAYS goes up.
In the words of that sage of the 1930's, Ernest Angley, who wrote a short book full of euphoric quotations from the period just before (and just after) the 1929 crash -- "Oh Yeah!"
In the current issue of The Privateer, we flesh out Mr Angley's "Oh Yeah" to fit present circumstances. Suffice it to say here that you can't have a slowing economy, and a huge trade deficit, and a continually strengthening currency at the same time. Something has to give. And the something that is giving - fast - is the U.S. Dollar.
If you have been following these commentaries, you know that we have been pointing straight at the strong Dollar as being the last means by which all the economic boats have been kept rising with the tide. Well, the Dollar has not only stopped rising - it is FALLING. Somebody noticed on Friday, and Gold put on the kind of spike we have not seen since early February, and before that in late September last year.
As long as the markets keep going up, very few will notice. But this spike on U.S. and all other major stock markets fits the classic description of a "bull trap" perfectly. The key, as it has been for months now, is the Dollar itself. In this context, it is highly significant that the last big fall taken by the Dollar (mostly against the Yen) began in the first week of September 1999. Gold surged $US 80 three weeks later.
But that was FOUR U.S. rate rises ago. Very few in the U.S. today would give any credence to the proposition that the Fed is raising rates to support the Dollar. Everyone thinks that the only reason to raise rates is to damp down "inflation". The inflation has already happened, as witness the stock markets themselves. Now, the consequences are starting to show up. One is the recent weakness, despite this week's boom, of U.S. stock markets. Another is the gigantic trade deficit. Another, more recent one, is the weakness in the Dollar. And on Friday, we got the sniff that a fourth consequence might be bubbling under - Gold suddenly took off.
All of this is happening completely out of sight of the world's investing public. All of it is poised to hit them right in the back of the head. For an in depth analysis of how the situation may unfold, see the current issue of The Privateer. The most encouraging thing about this Gold price spike is that it just might give those who DO understand the situation a means of protecting themselves from it. It has been a long time since Gold performed its historical role of being a safe haven from financial upheaval. And financial upheaval there is certainly going to be.
The tragedy is that few can see it coming. The potential saving grace is that those who CAN see it coming won't be hit by that truck we mentioned above because they own Gold. Even better, Gold is showing the first signs of coming to life again.