The 0.50% refers, of course, to what everyone expects to be pared off the Fed Funds Rate when the Federal Open Market Committee (FOMC) meets on May 15. The 20 Tonnes is the amount of Gold which the Bank of England is going to auction on the same day.
Before reading further in this commentary, we invite you to read an excerpt from The Privateer market letter. This is the "Global Market Report" from issue #373, published on May 9, 1999, almost exactly two years ago. The article deals with the announcement by the Bank of England, on May 7, 1999, that it was going to begin a regular series of Gold auctions.
The BoE Auctions were originally begun with one purpose in mind, to hit the $US Gold price on the head. Why bother, you may well ask, since at the time, Gold had been trading at under $US 300 for more than a year an a half? The reason(s) are in The Privateer article (see the link above). These were the first out-in-the-open Central Bank Gold sales since the U.S. Treasury/IMF Auctions of the late 1970s. But unlike the Treasury/IMF Auctions, these Auctions by the BoE succeeded. Gold was pushed down to levels not seen since 1979, falling as low as $US 252.50 in late August 1999.
Now, we have the first definite signal that the end of the present series of Auctions is in sight, with the BoE shrinking the amount of Gold on offer by 20%.
When Gold started rising (from $US 102) in August 1976, the U.S. decided that they had better do something about it. They insitituted Gold auctions. These auctions were very successful, given the atmosphere of rampant price inflation of those days. It took Gold until the end of 1978 to regain the level ($US 195) it had reached four years earlier. The rest, and the boom to $US 850, is history.
The BoE Auctions since 1999 have taken place in what, on the surface, looks to be completely different circumstances. There has been no sign of rampant price inflation. Interest rates have not been soaring - just the opposite so far this year. Gold is not percieved as any type of threat to the Dollar by the markets.
But are the circumstances really different? In the late 1970s, the prices of consumer goods were inflating rapidly. At the end of the 1990s, it was the prices of financial assets, notably stocks (until the Nasdaq burst anyway). But in both eras - REAL inflation - the issuance of new money through credit creation - was BOOMING. The only difference is that the Fed's pumping of new money into the sytem since 1999 makes what they were doing in the late 1970s pale into absolute insignificance.
In the late 1970s, U.S. interest rates were going to the moon. Now, OFFICIAL interest rates are being smashed into submission by Central Banks around the world (now including the ECB) all led by the Fed. But what about MARKET rates? Treasury yields have recently begun to spiral UPWARDS, led by the yields on the one and two year paper. Why? Because the Fed is not content to merely lower the Fed Funds Rate. It is coupling that with an orgy of new money creation.
All of this is INFLATIONARY in the true meaning of the word. All of it is putting more and more pressure on market rates. All of it is managing to keep the bogeyman of "recession" at bay, at least in the perception of most investors. But underneath all the "spin", the situation is deteriorating rapidly.
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)
"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."
(Gold This Week - May 4)
If you cast your mind back to the period between the beginning of the "Asian Crisis" in mid-1997 and the beginning of the BoE Gold Auctions in mid 1999, you will remember a crescendo of "Gold debunking statements". The IMF was going to sell all its Gold. The Swiss were going to sell all their Gold. Central Banks everywhere (led by the Reserve Bank of Australia, which announced that they had sold more than half their Gold in July 1997) were going to replace all that useless yellow stuff with good old U.S. Treasury paper that earned interest. Gold was definitely "out". It had no part to play any more. In the future, driven by productivity gains through the rampant purchase of what most people used as glorified play stations (computers and software), the "new economy" would emerge triumphant.
Yet in the midst of this hysteria, the BoE saw fit to rescuscitate the old and unproven device of Gold auctions. They held the first one in July 1999. Gold hit a 20-year low just over a month later. It has not been lower since.
And now, just as the BoE seems to be running out of ammunition, Gold is stirring again. The situation now is actually far WORSE than it was in the late 1970s when the Treasury/IMF were striving to stem the Gold tide. They failed.
There is, of course, no Gold tide yet this time. All we can say with some confidence is that we have reached the "low water" mark. But the signs are accumulating fast. All that now remains to happen is for the "Psychosis" (see Gold Last Week - link below) to wear off. May 15 is a key date. If circumstances warrant, we will be updating this commentary once the smoke clears from the Gold auction and the Fed meeting on that day.
