"But the U.S. Dollar IS the world's RESERVE currency. And because it still holds that position, it is not - YET - subject to any type of rational valuation at all."
(Gold Last Week - June 29)
On June 28, an unnamed but "senior" Bush Administration official was quoted as unequivocally stating that the "strong Dollar policy" was intact. This official also came very close to DEMANDING that Europe start slashing interest rates and Japan start printing money. A few days later, Treasury Secretary O'Neill was quoted as saying that he had "asked everyone", but couldn't find out which official had made these statements.
"Okay youse guys - who spilled the beans??"
Comical, isn't it? What is even funnier is that the currency markets didn't find it funny at all. June 28, when this anonymous official made his (or her?) comments was the day after the latest (-0.25%) rate cut. On that day, the $US Index exploded upwards by 1.61 points to hit a post-1986 high of 120.29. It was also the day when Gold completed a two-day swan dive which saw it fall from $US 276.20 to $US 270.00. The Bush Administration WANTS a strong Dollar. The Bush Administration GETS a strong Dollar.
And, of course, they also get a "weak" $US Gold price
This week, Treasury Secretary O'Neill prepared to head off to Rome for the G7 Finance Ministers meeting held on July 7. Mr O'Neill couldn't find the official who had made the statement on June 28. But he did say that while he didn't want to tell any other nation how to run their economy, he thought that Europe and Japan could do more to become the "locomotive" of world growth.
On July 5, The European Central Bank met and refused to lower their rates. Sweden, which is NOT a member of the EU, actually had the temerity to RAISE their rates by 0.25% from 4.0% to 4.25%. "Oh Yeah!" - said the currency markets. The $US Index reacted by rising 1.05 points to another new high of 121.21 points
Of course, while the Dollar was shooting UP on July 5, Gold was heading down - again in $US terms. As you can see on the chart above, the $US Gold price has retraced its gains and is once again down to the levels it reached in early June - after pulling back from its assault on the $US 300 level in late May.
On the very next day, Friday, July 6, the U.S. Dollar gave up ALL of its rise on the previous day, falling 1.06 points back to 120.15. On top of that, U.S. stock markets went into the tank, with the Dow falling 227 points to its lowest level since April 18. The stage is truly set for the G-7 meeting this weekend.
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.
This week on U.S. stock markets, the Dow has lost 2.4%, the S&P 500 has lost 2.8%, and the Nasdaq has lost 7.2%. On top of that, the latest U.S. unemployment figures (for June) have come in at 4.5%. That's only up 0.1% from May, but June non-farm payrolls contracted by 114,000 workers - the expectation was for 44,000.
The result on Wall Street can be seen in the figures above. The further result was that 23 of the 25 "primary dealers" on Wall Street who are routinely polled as to their predictions for future Fed actions expect the Fed to cut again (by another 0.25%) when the FOMC next meets on August 21.
"The U.S. is now in a position in which it has to hold Gold down "forever", or see its position as the purveyor of the world's sole reserve currency come to an end. This will prove an impossible task, all that remains to be seen is how much MORE damage is done in the process."
(Gold Last Week - June 29)
How much more damage? Look at U.S. stock markets. Look at the inexorably rising level of U.S. unemployment. Look at the still profligate spending habits of Americans. Look at the credit card defaults and bankruptcies. Look at the increasingly strident demands from the U.S. that Europe and Asia get on board and INFLATE!
But most of all, look at the descent of "mainstream" economic and financial analysis in the U.S.. Remember, during the tech stock boom, when the bigger the LOSS a company reported, the bigger that company's GAIN on their stock price? That phenomenon is now being repeated, but now, it is not Yahoo or Amazon which is booming, it is the U.S. Dollar. The worse the U.S. economy gets, the more the Fed cuts U.S. rates, the HIGHER the Dollar goes. And, just like the tech stocks, everyone believes that it is a mere matter of time before the U.S. economy rebounds and "validates" the PRESENT strength of the Dollar.
The stock market bubble is broken. The tech stock bubble has disintegrated. Only the Dollar bubble remains.
The difference, however, is not merely of degree. The ultimate refuge from the bursting of a bubble in any sector of a financial system is the currency itself. But when it is the CURRENCY which is in a bubble, there is NO escape within the financial system itself. The only "escape" is OUTSIDE the financial system. And that means, as it has always meant, REAL goods, saleable skills, and precious metals.
In short, it means SAVINGS. Ultimately, one can be absolutely CERTAIN that an economy and a financial system is fatally flawed and on the brink of serious implosion when both economic "orthodoxy" and political policy are united to discourage savings of any kind. In the U.S., it has almost reached the point where saving is considered "unpatriotic". What is needed, says everyone from the President on down, is more SPENDING!
It has been a long time since the challenge in investment markets was not how to make more, but how to keep what one already has. That is the challenge we are all now facing. For most of recorded history, the challenge was easily met. Hold the precious metals. The answer remains the same, but the challenge is not so easy to meet anymore. Gold, in contradiction to ALL tested and proven economic laws, is doing no more than holding its own. But that's better than almost any other form of "savings" right now.
Is the big fall on the U.S. Dollar index on July 6, the beginning of the air coming out of the bubble? Impossible to know. Will the air come out of the Dollar bubble. Impossible to avoid. As we said last week, its a matter of time and patience. Gold in $US terms is down 2.56% so far this year. There are VERY few global investments which have done that well. Stay tuned.
