It is clear that the "fat lady" has not cut loose yet, although you could hear her muffled tones pretty clearly back when the Fed had to step in to buy Bear Stearns for JP Morgan six weeks or so ago. That was, of course, shortly before the Fed's second 0.75 percent rate cut in less than two months, all done in an unavailing attempt to get lending and borrowing started again in the US economy.
As you know, Gold fell all the way down to $US 851 on a spot future closing basis this week - on May 1. It actually got as low as $US 846 intraday on May 2 before rebounding to close the week at $US 858. In fact the spot future Gold contract fell almost $US 45.00 between May 29 and May 1 - with the Fed's announcement of their latest decision on US interest rates coming smack in the middle of that three day period. Most other metals fell too, as did oil. On the flip side, the US Dollar rose as did US and global stock markets. Nope, the fat lady hasn't cut loose - yet.
Ever since the near death (for the financial system) experience of Bear Stearns, the powers that be in Washington and on Wall Street have been doing what they do best. They have been grabbing public perception by the nose and pulling it around in a new direction. Behind the scenes, the direction has been undeviating. The Fed is trying with ever increasing desperation to restart the credit expansion.
The first and most time honoured method to bring this about is, of course, for the Fed to lower interest rates. This has "worked" ever since WW II. It most recently "worked" over the period 2001-04 when Mr Greenspan hauled the Fed Funds rate down from 6.50 to 1.00 percent and held it there for a year. That re-started US and global stock markets which had a near death experience in 2000-02. It also kicked off the biggest financial bubble in modern history, the US (and global) housing boom.
Lowering rates worked then, so it'll work now, right? That's what the Bernanke Fed had no choice but to peddle. The problem is that while it worked for Wall Street, where the stock market has now almost regained the levels it started the year with, that's about the only place it HAS worked. The money center banks in New York which took the credit expansion to grotesque extremes through their derivatives and bundling of debt paper into ever more toxic sludge are only still standing upright because the Fed has NOT relied solely on lowering rates. It has come up with all kinds of new schemes - some revived from Depression days and some NEVER tried before - to translate "liquidity" (of which there is plenty) into LENDING (of which there is still not nearly enough).
But the BIG problem for the Fed, Wall Street, the money center banks and the orchestrators of the whole choir in Washington DC is that all the "stimulus" packages are NOT working in the US economy itself. Most Americans are now getting poorer in REAL terms far faster than they ever got "rich" on paper while the various credit-induced booms were still booming. "Jingle mail", the dispatch of the house keys back to the bank because the "owner" no longer wishes to service a debt bigger than the house is worth, is not conducive to a contented public. Nor are the huge price increases on almost everything an American can buy. Nor is the fact that more and more Americans are utterly tapped out. They could not borrow even if they wanted to. Such is the end result of a nation in which individuals do not save.
On May 2, the US Commerce Department came out with the news that the US lost 20,000 jobs in April - one quarter of the (revised) 81,000 jobs snuffed out in March. Not only that, the official unemployment rate fell by 0.1 percent to 5.0 percent. This was immediately siezed on by the financial fraternity:
"We are in a recession, this report doesn't change that. ...What it does is support the idea that the downturn will be mild. Consumer spending isn't going to tank." This came from the Bank of Tokyo Mitsubishi in New York
"Obviously a negative number is still negative. But it is so close to zero that essentially it means flat." This came from John Hancock Financial Services. The spokesman went on to say that with the tax "rebates" in the mail, a boost in jobs growth is almost guaranteed.
The claim now filling the airwaves is that sure, times are tough. And yes, maybe we're still facing a mild recession. But it will all be over soon. The Fed doesn't need to cut interest rates any further. Now they can focus on getting rid of the pesky "inflation" which has cropped up in the wrong place - in the prices of real goods rather than financial assets. Once that's done, we can all go on our merry lending and borrowing way again.
That's official, by the way. Mr Paulson, US Treasury Secretary was recently quoted to the effect that he thinks that the US economy is closer to the end of the economic downturn than to the beginning.
So, if the problem is that close to a "solution", we can't help wondering why the Fed announced a further increase in their "Term Auction Facility" to $US 150 Billion a month on May 2. That "facility" has now almost quadrupled from the $US 40 Billion a month it started with in December. And then there is the "collateral" which the Fed accepts at these "auctions", which has once again been "widened" to include "AAA rated asset-backed instruments". This is a euphemism for student loans, the latest form of debt paper to come under pressure on the markets.
Even more ominous, the ECB and the Swiss both announced increases in their "swap" arrangment with the Fed on May 2. The Fed has not had to concern itself with accumulating "foreign reserves" for decades. After all, the US Dollar IS the global reserve. Now, the swap facility, which began less than six months ago, is ramping up quickly. God forbid that the US monetary authorities should have to go out and obtain this foreign exchange on the markets. Where would the US Dollar be then? And where would Gold be then?.
A lot higher than it presently is, and likely a lot higher than it was in mid March when it breached the $US 1000 level for the first time. But here we are just below the $US 860 level with Gold having given back almost all its 2008 gains over the past six weeks. Over the past two weeks, Gold has broken decisively back below $US 900 and has gone on to fall to $US 850. Between April 19 and 29, the StreetTracks Gold Trust, the biggest US "ETF" (Exchange Traded Fund) had its Gold holdings fall from 641.8 tons to 580.4 tons. That's a fall of 9.6 percent.
On March 17, we added the $US 1000 "X" to this chart - and that is as far as Gold got. As you can see, Gold has descended in two large "spurts" since then, the most recent taking it all the way down below the $US 885 level. Two weeks ago, Gold had recovered about half of its sell-off. Then came the second big sell-off, which began with the $US 27 fall on April 18 and has been as low as $US 850.90, so far.
(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 at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold improved upon those January levels in all four currencies as spot future Gold closed above the $US 1000 level for the first time ever in the middle of March. But then came the big Gold sell-off - in two stages - the second of which has yet to find a bottom.
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