Just under a week ago, we put out the current issue of The Privateer (#647 - Published on February 7). Looking ahead to the coming two weeks at the end of the issue, we said this: "Mr Obama does not HAVE to sign the Treasury's debt limit hike into law right away, and hasn't yet. But he surely soon will." Actually, Mr Obama waited for more than a week after the House passed the bill raising the ceiling. He waited until February 12 to officially increase his Treasury's borrowing limit by $US 1.9 TRILLION to $US 14.294 TRILLION.
This is unusual. This is Mr Obama's third debt limit increase. His predecessor presided over seven of them. On all the previous occasions, the debt limit was signed by the President almost as soon as the "ink was dry" on the bill's passage through the Congress. But not this time. Perhaps the fact that the Treasury was auctioning off $US 81 Billion (a new record) of new debt this week had something to do with it.
Or the reason for the delay might have been because the question of "sovereign debt" has become a big issue on global markets recently.
Check out this article - Forget Greece, The US Almost Had A Failed Treasury Auction - published on February 12 a few hours before Mr Obama signed the debt limit bill. The problem is laid out very well. So is the necessity to up the Treasury's debt limit with the absolute minimum of fanfare.
We must admit we find this highly amusing. When another nation is faced with a similar dilemma, the old "cure" used to be the IMF stepping in and directing it to slash its spending and raise its interest rates. More recently, nations like Greece have been given an even more draconian set of instructions to deal with a "sovereign debt" problem. Then, when the people of Greece rebel against this sudden "austerity" (as would the people of ANY nation, most certainly including the US), questions are raised about the political "will" of the government.
In the face of the EXACT same problem for which Greece and its fellow "PIGS" nations are now being pilloried, what does the US government do? It passes a "law" giving itself "permission" to borrow more. In this case, $US 1.9 TRILLION more. And, having done so, in stark contrast to a long line of "other" nations (Greece being merely the latest example), the US has re-confirmed its solvency. Not only that, it has preserved the status of its currency and the reputation of the debt paper it issues as being the global "safe haven" in times of financial strife.
If "everybody" could do what the US government blithely assumes it can do, there would never have been a GFC. Nobody from a 16-year-old wielding a first credit card to a sovereign nation could ever go bankrupt. The entire concept of "debt" would become meaningless, just as the "we owe it to ourselves" advocates of the 1930s pretended it was. Economic "growth" would be no more difficult than the process of keeping on moving the decimal point on a number representing the "debt" one more "zero" to the right. As long as there was a "something" (like a "1" for instance) at the beginning of the number, it wouldn't matter at all how many "zeros" followed it.
Watching global paper investment markets ebb and flow with the changes in the situation with Greek sovereign debt is surreal. When the European politicians assure the world that Greece will be bailed out, everybody piles back into what is called the "risk assets" - non US Dollar currencies, stock markets, commodities, precious metals. When the Europeans follow that up with absolutely NOTHING of a concrete nature about an actual bailout, the global investment community reverses its field and piles back into the "safe havens" - the US Dollar and Treasury debt.
Meanwhile, the US government is making all the same noises as is the Greek government about cutting spending and curtailing "stimulus" and even raising taxes (on the rich). So why is the US Dollar and Treasury debt a "safe haven" while the wastepaper put out by Greece (and by implication the currency put out by the Euro members of the EU) is getting riskier by the day?
The reality is, of course, obvious. Every "sovereign nation" is in the same boat. The IMF remarked about the G-7 that their combined government debt was about $US 30 TRILLION. Nor is there any prospect of this amount diminishing. The level of "governance" that the people of so-called "developed" nations have become used to precludes such a thing.
The fact is that the US government has just given itself permission to borrow another $US 1.9 TRILLION. This amount, it is hoped, will see that same government through their mid term elections this November and, hopefully, into the year of 2011 before the "limit" has to be raised again. It is also a fact that this increase in the US Treasury's "limit" is about five times the total funded debt of the Greek government.
We won't go into the "unfunded" portion of the debt. Neither the goverrnment of Greece or the US or anywhere else has the slightest hope or intenton of ever paying that off.
The notion of the US Dollar and Treasury debt paper being seen as the ultimate in "safe havens" is starting to fray at the edges amongst actual human investors. But most investment these days is done by computer programs and, judging by the market action, there has as yet been little if any "reprogramming" going on here.
There has certainly not been much "reprogramming" in what is spit out all over the world in the guise of mainstream financial analysis.
Gold is up this week, as is the US Dollar. But in US Dollar terms, Gold still languishes about $US 130 (10.5 percent) below the level it reached before the spectre of "sovereign debt default" was released onto the financial scene with the US ratings agencies' debt downgrades of last November/December. If you haven't yet read the article linked to above, please do so. It will be interesting to see how long the financial community can cling to the separation between US financial instruments and any type of sovereign debt risk.
(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 2008. 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 in 2008.
By February 20, 2009, Gold had made it all the way back to the $US 1000 level. But it did NOT break through the $US 1000 barrier. Instead, what was traced out on this chart was the right shoulder of a gigantic "reverse" head and shoulders formation. Then Gold made it back to $US 1000 and on September 16, 2009, closed at $US 1020.20. That broke decisively above the $US 1000 "double top" on this chart and revalidated the entire bull market - from the bottom. In just over two months, from the end of September to early December 2009, Gold soared from $US 1000 to $US 1218. The subsequent and inevitable correction has seen the spot future closing price dip below $US 1100 twice, the second ocurrence came two weeks ago. Gold has now traded below $US 1100 since February 3.
In February 2009, spot future Gold closed above the $US 1000 level for the second time. While the close did not quite equal that of March 2008 in $US terms, it set new all time highs in terms of many other currencies - the Yen being an exception. That was because of the recovery of the US Dollar which had taken place since March 2008.
On September 11, 2009, spot future Gold closed above the $US 1000 level for the third time. It has remained above the $US 1000 level continually since the end of September and rose more than $US 200 almost straight up before the December 4 correction. As concerns about "sovereign risk" mount, Gold is starting to recover against a still strong US Dollar.
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With the USDX remaining above the 80.00 level, the only currency in which Gold remains below its level in this table is now the Aussie Dollar Gold price. At current (February 12, 2010) exchange rates, it would take a Gold price of $US 1388.20 for the Aussie Gold price to equal the all time high it set on February 20, 2009.