Everyone has noticed it by now. It began on May 24, the day of the Russian Gold sale rumours which knocked about $US 12 of the Gold price in about as many minutes. After the close of the market on that day, Alan Greenspan made a speech. In the course of his speech, Mr Greenspan stated that he saw no signs of inflation
Mr Greenspan has made that same assertion several times since then, as have several of his Fed colleagues. And since this rolling thunder began, there has been nothing to refute any of them.
Gold, which had awakened with a start on May 18, fell as fast as it rose. Between the Russian scare sweeping the Comex floors on May 24 and the two trading days after the Memorial Day long weekend, the spot future Gold price fell more than $US 20.
When Mr Greenspan talks about "inflation", he is of course talking about a rise in prices. And not just a rise in any old prices, a rise in the prices of goods and services that people have to buy to conduct their everyday lives.
"Measuring" inflation by watching prices is a comical exercise. If the price of something you want to BUY goes up, THAT'S INFLATION! If the price of something you own or want to sell goes up, that ISN'T inflation. No one has ever, to our knowledge, considered rising stock prices, for example, to be "inflationary". Nor do house owners consider rising house prices to be "inflationary". The only rising prices which EVERYONE considers to be "inflationary" are the prices of things that everybody has to buy every day - like food, and gas, and electricity, etc.
Oh, and there is one other rising "price" which is, even after all this time, almost universally considered to be "inflationary". That's the price of GOLD.
We now, of course, have positive "proof" that Mr Greenspan was "right". There are no signs of "inflation". The U.S. May PPI is up only 0.1%. The May U.S. CPI is up 0.4% - but the "core" CPI, the one we have been trained to look at, is only up 0.1%.
From here, it gets even more comical. Wall Street is getting more confident by the hour that the Fed will not break their streak. When Mr Greenspan began his litany of "I see no inflation", almost everyone on Wall Street was resigned to an 0.25% rate cut at the next FOMC meeting on June 26-27. But the markets had a bad week this week, and the official numbers "proved" that U.S. inflation is nowhere to be found. So now, Wall Street is quickly convincing itself that the Fed will indeed go the "full monty" and bestow upon them another 0.50% cut at the end of June
One would think that grown men and women would not be quite so gullible. But they clearly are. Having watched the Fed shovel money at them hand over fist for YEARS, they are still ready willing and able to be told that there ain't no "inflation". And just in case anyone isn't fooled by the CPI and the PPI (most people arent', after all, they actually have to BUY real things), the old reliable Gold price can be trotted out as exhibit A.
The problem is that Gold is not comatose any more. The price is actually moving up and down. The other problem is that Gold is in a BULL market everywhere OUTSIDE the U.S.A..
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.
"At some point the Gold elbbub has to end. The first step in that process was always to bring Gold back onto the radar screens of world (and especially U.S.) investors. That is now in the process of happening. The ultimate step, however, will NOT come until those who are intent on keeping the price in check are seen to be in retreat (a la the end of the London Gold Pool of the 1960s and the IMF/Treasury auctions of the 1970s). That won't come this side of $US 300 Gold."
(Gold Commentary - June 8)
There is no doubt in our minds that this process has begun. But it's going to be a fight every step of the way. The London Gold Pool wasn't given up without a fight, and neither were the IMF/Treasury Gold Auctions of the 1970s.
There are abundant reasons why the price of Gold SHOULD go up in U.S. Dollar terms, just as it has been going up for some time in terms of every other major currency. So far, however, Gold has merely started to "churn" a bit. Instead of trading on an average daily basis of less than $US 1.00 - as was the case in early May - daily moves of less than $US 1.00 are becoming increasingly rare.
Gold in every currency except the $US is signalling a breakout. Gold stocks are signalling a breakout. The money pumping of the Fed is signalling a breakout.
But the entire financial world is also dependent on the U.S. fighting its way out of its deepening economic slump. Most of the investment world still thinks that lower U.S. rates are the key. For the expectation of lower interest rates to survive, any sign of U.S. "inflation" must be prevented from seeing the light of day. If Mr Greenspan says he can't see it, it must NOT be there. More important, it must not be SEEN to be there.
If it is, there go the expectation of more U.S. rate cuts. If the expectation of more U.S. rate cuts dies, so does the expectation of a U.S. economic recovery. And if THAT dies, so, over time, do U.S. markets and the U.S. Dollar.
The stakes aren't getting any smaller - they are steadily getting BIGGER.
