First, Happy Easter to all reading this commentary. We held over a day to see if anything would happen in "Good Friday" trading in Asia. It didn't. Gold This Week - on Comex - is up the grand total of ten cents. As far as the Gold price is concerned, there's not much to say because not much happened. Gold is once again dead in the water.
What IS interesting, and getting more so by the week, is developments surrounding that other type of "money", the one everyone uses. We refer specifically to two events. First is the ongoing "pumping" of new money into the system by the U.S. Fed. Over the past nine months or so, the U.S. "broad money" (M3) measure is bounding ahead at an annualised rate of 13%. The second feature is the continuing refusal of the European Central Bank (ECB) to play the game and lower their interest rates. Again on Thursday, April 12, the ECB met and refrained from cutting their rates. Oh, and by the way, European "broad money" measures are actually declining, ever so slowly.
Outside the EU itself, and especially in the English-speaking world, expectation was almost completely universal that the ECB would lower rates on April 12. When they didn't, the "outrage" was comical to see. But since then, a few more sober assessments have begun to appear.
It has become obvious, even to U.S. monetary "analysts", that the Fed and the ECB (the two Central Banks which REALLY matter), have decided upon diametrically opposite courses of action. The Fed is hell bent on restarting economic "growth" - through borrowing of course. The ECB, by their lack of action on rates, is coming down on the other side of the aisle. What the ECB is actually saying (by refusing to lower rates), is that SAVINGS is actually the way to foster economic "growth". HERESY!
The fact is that this fundamental dichotomy between "monetary policies" is now starting to be noticed OUTSIDE Europe, even in the U.S. itself. The further fact is that, in valid economic theory, long-term growth cannot be indefinitely maintained simpy by borrowing. Finally, the fact is that for genuine saving to take place, there must be something solid to SAVE.
A "floating currency" backed by nothing more than debt paper which can be redeemed only by the taxing power of government is NOT a solid vehicle for fostering saving. We are beginning to see the first glimmer of this fundamental truth coming out into the open, courtesy of the ECB.
The term "bubble" is a useful one in financial analysis, referring as it does to any market which has seen prices blown up to disproportionate levels. But, in this context, what is the opposite of a "bubble"? We don't know of a convenient word to use, but if one wants to describe the present $US Gold "price", that is what we are seeing. How about an "elbbub"? Kinda catchy - don't you think?
A "bubble" has nowhere to go but DOWN. An "elbbub" has nowhere to go but UP.
The chart of $US Gold is above. Here are the charts of Gold in the other currencies we cover.
Gold in Yen
Gold in Euros
Gold in D-Marks
Gold in Aussie Dollars
A little over a year ago, the Nasdaq was a "bubble". Now, the Dollar is a "bubble". ALL BUBBLES BURST.
(Gold This Week - March 30)
If the U.S. persists in lowering interest rates and at the same time using their Central Bank to flood the world with new debt instruments of all descriptions, the Dollar bubble will burst spectacularly. If the Europeans stick to their policy of NOT lowering their rates, this burst will come sooner rather than later.
In this process, Gold is the sleeping giant. In EVERY prior era of history, the ultimate form of wealth preservation through savings has been Gold. In every prior era of history when economic growth was indeed built upon legitimate savings, Gold was (directly or indirectly through "money substitutes") what was saved. As the economic imbalances in the U.S. become clearer and clearer, history comes closer and closer to repeating itself.
The $US Gold price is also a "product" (in reverse) of the great credit-creation boom of the 1990s. As THE alternative to the Dollar and all the paper investments based on the Dollar, Gold has been ruthlessly suppressed. The reason is achingly obvious. The U.S. has literally "financed" its boom of the past decade on massive new debt issuance. Any link between the Dollar and Gold would have made this impossible. Further, if the Gold price had not been suppressed, then Gold would have been a viable alternative for foreigners and Americans alike who saw the "writing on the wall". This could not be allowed to happen. It has not been allowed to happen.
But now, it is daily becoming more obvious that the repression of Gold cannot go any further. To put it simply, the Gold price "action" so far this year is demonstrating more and more clearly that Gold has little if any "downside risk".
The only step left to take is to transfer this perceived lack of downside risk into a dawning realisation that Gold actually has considerable UPSIDE potential. The ongoing and fundamental disagreement between the Fed and the ECB about the nature of economic growth and the proper (if any, but that's another story) role of a Central Bank is slowly coming out in the open.
We simply have to wait and watch. The Dollar is inexorably losing steam, and cannot break through the multi-year highs it set late last year. Treasury bond yields have spiked this week. Even U.S. "agency debt", as issued by the GSEs, is beginning to come under some pressure. The noose has been laid around the "necks" of ALL U.S. Dollar denominated asset classes. And the longer the ECB sticks to its policy of not moving their rates, the tighter that noose will get.
