"A jump in (U.S.) unemployment would almost certainly trigger a share sell-off."
(May 4 - Aaron Patrick - New York reporter - Australian Financial Review)
What has this got to do with Gold? - we hear you ask. Quite a lot, but more on that later. Most people would regard Mr Patrick's assessment as entirely reasonable. Please remember that he made it before trading began in New York on May 4.
The "jump in unemployment" was duly announced on May 4. The U.S. unemployment rate for April came in at 4.5% (expectations were 4.4%). Worse by far, there were 230,000 job losses in April, the most in a month for ten years and a figure nearly five times higher than the 58,000 jobs lost in March. The initial reaction to all this was a Wall Street sell-off, a big slide in the U.S. Dollar, and a higher $US Gold price.
The Wall Street sell-off lasted about an hour. By the close of trade, the Dow had RISEN 154 points to 10951, its second highest close this year. The $US still closed lower, but far above the level it had reached earlier. And Gold closed with a loss of $US 0.20.
Of course, it doesn't take a Rocket Scientist to spot the reason for this turnaround. Remember the G-7 meeting last weekend and the issue that, reportedly, wasn't discussed - the refusal of the European Central Bank (ECB) to cut their rates? Well, the fact that U.S. Treasurer O'Neill came out and stated that he did NOT put pressure on the ECB to cut rates put the wind up Wall Street. Over this past week, the markets had been in the doldrums as investors pondered the possibility that there might not be too many more Fed rate cuts on offer. And then, on Friday, May 4, a perfectly HORRIBLE piece of economic news was released.
The reaction was, almost literally, a knee jerk one. "To hell with the ECB. To hell with the Dollar. The Fed has no choice but to cut rates. And THAT will fix everything!".
For a few days, some unbelievers were starting to question Mr Greenspan's omnipotent interest rate policy. But on May 4, these pagans were firmly put back in their place. Once more, the faithful affirmed their faith. We doubt if Mr Greenspan will be "canonised" in this life or the "next". But he has long since achieved Sainthood on Wall Street. Some call it "investor confidence". We call it blind faith. You can call it anything you like, but the fact is that it still holds sway, not only on Wall Street, but right across the U.S.A.
There has been absolutely NOTHING to break the continuing litany of bad economic news which has been sweeping the U.S. for months. The latest "inflation guage" was 3.3% - up from 1.9% in the previous month. Layoffs are continuing unabated. The National Association of Purchasing Managers reported that, outside of "transportation equipment", manufacturing output DECLINED 1.2% in their latest survey. And now, monthly job losses have come in at their highest total since 1991. Every time that the ACTUAL situation gets too big to look at, Wall Street puts the blinkers back on and focusses on the miraculous properties of lower interest rates.
This is not ignorance, it is a refusal to think. And it is much more than putting all one's eggs in one basket. It is the abdication of all responsibility for one's own actions. It is Wall Street's version of the children's Crusade, or if you like, a modern re-enactment of the Pied Piper of Hamelein, with Mr Greenspan playing the tune and Wall Street trailing behind him. It will, as have all like occurrences in history, come to a very bad end.
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)
Have you ever read a book called "Extraordinary Popular Delusions And The Madness Of Crowds"? Even if you haven't, the title says it all. Looking back through history, two things have always attended such bouts of popular delusion. One is the abdication of any reasoned outlook or judgement. The other is the abandonment of any prudence in regard to financial affairs.
What is ALWAYS a casualty of financial popular delusions (or "mass psychosis", if you prefer) is GOLD. Those who have it abandon it. Those who don't have it ridicule any suggestion that it can provide protection against the contagion. But Gold, alone amongst all the alternatives which are available, always DOES provide protection against the contagion, once that contagion has run its course.
There are always some people who are immune, who do not lose their heads while all around them are losing theirs. Warren Buffet, the man who refused to buy into the dot.com bubble, is a good recent example of this. So are all those who are quietly and calmly relying on the Gold they already own, and/or slowly accumulating more.
As we have said many times, both in these commentary pages and in The Privateer itself, there is NO way to predict the point at which people will come to their senses. The tragic fact is that most people don't come to their senses, not because they are incapable of it, but because they simply can't face the fact that they have been caught up in a mindless frenzy.
The only course to take now is to have patience, to keep watching for the delusion to burst, and to protect yourself. Gold has been inching up in $US terms for a month now. It remains almost without downside risk. And the risk of NOT owning Gold now is worse than merely losing money. The risk is to be swept up in the madness of crowds.
