The Dow is nearly back to its high for the year after a 7 percent plus leap this week. The trade-weighted US Dollar Index (USDX) is back below the vital 80.00 level, a level it had never spent any time below until the credit crisis hit in the last half of 2007. And Gold, in US Dollar terms at any rate, has had a reasonably good week after its brief sojourn below the $US 910 level last week as the G-8 Heads of State met in Italy.
Meanwhile, the Obama Administration has decided to take a chance on NOT bailing out a finance company. CIT is one of the biggest lenders to small and medium sized businesses in the US. It has been decided that the bankruptcy of CIT does not represent a direct threat to the "system" - the big (financial) businesses and money-centre banks - so it doesn't present a "critical risk to the economy."
Actually, the collapse of CIT represents a huge risk to the economy - the REAL economy - the legions of small and medium sized businesses in the US which provide the great majority of productive employment. But the Obama Administration does not dare bail out CIT for the same reason it has not dared to bail out California and the many other states now in dire financial straits. To do so would set a precedent which the Feds in Washington could not meet. With official estimates of the federal budget deficit for the year which ends on September 30 already nudging $US 2 TRILLION, a bail-out "carte blanche" would simply overwhelm the ability of the Fed and the Treasury to borrow and spend/lend.
Washington is having to become more and more selective about which "system" it bails out. It can bail out the pillars of the credit money system, the big money-centre banks and financial houses and the big businesses (like GM) which have in recent times become focussed on manufacturing "credit" rather than goods. Or it can bail out the dwindling core of the REAL economy - the small businesses, the financial houses which cater to them, and the individual productive American. It can't do both. And it is clear which sector of the "system" is most important to those in government.
The Obama Administration and Mr Bernanke over at the Fed are the "pointy end" of a US political and economic establishment which owe their power to the system they have created. The only way they can "bail out" the REAL US economy is to stop sucking the life out of it in order to preserve their own positions. That would mean a genuine SHRINKAGE in the size and influence of government. It would mean an about face on a policy which has been firmly in place ever since the advent of the income tax and the central bank in the US almost a century ago. Tragically, there are very few historical precedents for political and economic establishments which have done this voluntarily.
If you want a measure of which governments are most addicted to hanging onto their power no matter what, a good one is to observe which governments are the most reluctant to even discuss the process of "winding back" the huge stimulus programs now being administered all over the world. No government denies that - at some point - such a winding back of deficit spending and stimulus programs is necessary. But some are more adamant than others that NOW is NOT the time to start. The US and UK governments - the governments of the two nations which have enjoyed the "free lunch" which comes with the custodianship of the global "reserve currency" - stand out in this regard.
The difference is that when the UK was the world's leading power, the money they tendered as the world's "reserve" was largely sound - it was Gold itself or paper redeemable in Gold. By the time the US took over the role of the provider of the reserve currency at the end of WW II, Americans had been barred by law from even owning Gold for over a decade. And since 1971, the US Dollar has been a pure fiat currency redeemable in NOTHING, something the UK Pound only became during WWI and after 1931.
In the current issue of The Privateer (#633 - published on July 12) we talk about the inevitable end of the Welfare State. It is inevitable because the "fuel" which feeds the giant bureaucracies which administer the Welfare State is running dry as tax revenues plummet around the world. As more and more financial institutions on the "periphery" (as seen from the centres of power) of the credit money "system" are abandoned to their fate, the fuel will dwindle further. All over the world, lower (municipal, city, state, county etc) governments are facing the necessity to "downsize". This necessity has not, yet, made it to the centres of power. It will, it cannot be stopped.
The thing to watch for now is where in the world a central government breaks out of the pack and starts to ease its burden off the shoulders of its productive citizens. This will be the nation (or nations) which will be best placed to start to "grow" again in a GENUINE economic sense once the global crisis has run its course.
In the meantime, every increasingly desperate effort by the "powers that be" - wherever they may be - to cling to their "system" makes the situation in the real economy of their nation worse. As a currency grotesquely ill suited to be a "reserve" for any sane purpose, the pressure on the US Dollar is literally growing by the day. Gold is quietly and calmly waiting. A functional economy needs a functional money. A functional money is a sound money, one which is NOT a plaything and financer of those who crave political power.
What Gold needs, of course, is to rise above the $US 1000 level and STAY there. From there, the debate about the nature of what underpins the financial "system" of government will inexorably take centre stage. The debate is necessary if the world is not to choke on unrepayable IOUs.
(Chart appears here in original analysis.)
A new low was hit on the chart when spot future Gold closed in New York at $US 705 on November 13 last year. This pushed the chart two "Xs" below the $US 715 support level established in late October and equalled early in November. Then came the first big turnaround - and upturn on the chart - of November 14. The region between $US 700-720 firmed as SOLID support for Gold. That support "zone" was emphatically confirmed as Gold rose by just over $US 110 between November 13 and November 28 last year.
On February 20, as you know, Gold made it all the way back to its previous all time highs. But it did NOT break through the $US 1000 barrier. Since then, Gold retreated to just below the $US 900 level in three moves down. What is being traced out on this chart is a gigantic "reverse" head and shoulders formation. The trading range between $US 900 and $US 1000 was broken early in April. Over the month of April, a tighter range between $US 870-910 was established. Gold went straight up on this chart for six weeks - from the start of May until early June. The close below $US 955 on June 9 turned the chart down. Six weeks later, and with Gold falling just below the $US 910 level this week, we have the upturn we've been waiting for on this chart.
We began the table below in 2007 and have extended it into 2009, even though Gold in all four currencies in the table remain well above their 2006 highs. The all time highs for Gold which occurred in 2008 have remained intact in US Dollars and in Yen.
But in terms of the Euro and especially the Aussie Dollar, the situation is very different. Gold hit new all time highs in both currencies on January 30 with situation being duplicated by Gold in terms of MANY other currencies. On February 20, those highs were taken out when Gold hit $US 1000. They were not taken out when Gold hit $US 1000 again in May. Right now, Gold in US Dollar terms is much closer to its all time highs than it is in terms of any other major currency..
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