Two very interesting events - so interesting that nobody in the US mainstream financial press took any notice of them - took place on January 12. First, President Obama officially sent a request to the US Congress to raise the Treasury's debt limit by $US 1.2 TRILLION. The Treasury had actually hit the limit on January 4 but Congress had "requested" a delay in their consideration of the matter since they were not back in session for the new year. At any rate, the official Obama request now means that the House and the Senate must vote on the increase in the next 15 days. It is conceivable, though hardly likely, that both Houses of Congress could reject the request. If they do that, Mr Obama will veto any legislation they come up with. Far more likely a scenario is that the ceiling raise will be quietly accomplished - around the time or just after the Fed's first FOMC meeting of 2012 and Mr Obama's State of the Union address.
The second event, which also took place on January 12, was the official announcement by the Fed that foreign holdings of US Treasury debt in their "custody account" had declined for the sixth straight week. This is the longest consecutive bout of foreign (read central bank) selling of Treasury debt ever. Given Mr Obama's request to Congress, the reason for these inexorable foreign sales is not too hard to fathom.
And the "wonderful coincidence"? Well that took place in a carefully choreographed fashion on the afternoon of Friday, January 13. Remember back in December last year when S&P threatened to downgrade the entire European Union, "within days"? That threat did not become reality within days, it took a bit longer than that. But on January 13, carefully waiting until about half an hour after US markets had closed for the week, S&P announced the downgrade of NINE European nations - including France. That leaves only three "AAA" nations left in Europe and only one - Germany - whose rating is still officially "stable".
Look at all the wonderful things that this S&P mass downgrade accomplished. First and foremost, it brought the EUROPEAN sovereign debt crisis right back into the headlines after a few days when it was threatening to wane. Even better, it pushed up the fear factor even further with the downgrading of France from its AAA status to an equal with the US position of AA+. The present "fund" which is standing between the Club Med European nations and sovereign debt oblivion is the European Financial Stability Facility (EFSF). The ability of the EFSF to borrow money on the so-called markets depends on the credit status of the nations which are contributing to it. Many of those nations, including France, have now been downgraded. That savagely cuts the amount the EFSF can borrow. It does more than that, it makes Germany, or more precisely the German taxpayers, almost solely responsible for whatever amount the EFSF DOES manage to borrow.
Officially, there were rumours all over Wall Street about this S&P mass downgrade for at least a day before it was announced. Also officially, the US government and the White House were informed of the downgrade in advance. How convenient for the Executive and Legislative bodies of the US government, both of which are TOTALLY dependent on perpetual and perpetually increasing Treasury borrowings for their future operation. As has been pointed out many times by many people, the longer the focus remains on Europe, the longer the US establishment has to go on pretending they can fix their equivalent problem.
Gold of course fell on the ratings downgrade news as the programmed stampede back into US Dollars and US government debt instruments duly took place. The stakes are already getting higher and the methods cruder with 2012 having only just started..
The significance of the table above is that it shows the all time high for Gold denominated in what is probably the most representative major "commodity currency" in the world - the Australian Dollar. That high was set on February 20, 2009, a month before the US Fed embarked on QE1 for the express purpose of rescuing the global market for US paper assets.
Gold in terms of the other three major currencies shown in the table had since gone on to set major new highs considerably above the levels reached in February 2009. At the end of July 2011, Gold hit new all time highs in terms of US Dollars, Euros, Canadian Dollars, Pounds and many other currencies. By August 4, 2011, there was a BIG change in the table as the Aussie Dollar Gold price took out its February 2009 high. It maintained those levels until the last week of 2011
When Gold reached its all time high in Aussie Dollar terms in February 2009, the Aussie Dollar was trading at $US 0.6377. This was at the height of the huge US Dollar rally which took place in the aftermath of the Lehman Brothers crisis of September/October 2008. The Aussie Dollar gained parity with the US Dollar (for the first time in nearly 30 years) on November 3, 2010, the day that the US Fed officially announced QE2. It then climbed steadily and accelerated in April 2011. On April 29, the Aussie Dollar reached almost $US 1.10. Over the last week of July 2011, it hit that level for a second time. Then the combination of a falling Aussie Dollar and a rampant $US Gold price pushed the $A Gold price into the black on the table above.
Gold in terms of the other three currencies in the table is a long way above the level it reached in February 2009. As we enter 2012, Gold's percentage gain in Euro terms has almost caught up with its US Dollar gains. In Australian Dollars, Gold is once again in the black after having slipped below its February 2009 levels over the last week of 2011.