The Captain and his merry crew here aboard The Privateer do a lot of research. Gold This Week has to be produced every week. The Privateer itself has to be produced every two weeks. In the course of this research, we often come upon items which make us sit up and take notice. On rarer occasions, we stumble across something that could best be described as mind boggling. And, on VERY special occasions, we find an item that is truly mind blowing - to the extent that we don't know whether to laugh or cry.
Usually, this dillemma is resolved in the form of an extended session of ROFL - Rolling On The Floor, helpless with laughter.
Such an item reared up and bit us on July 10. It was a statement made by U.S. Treasury Secretary Paul O'Neill. Actually, the statement was a repeat of one that he made to Wall Street executives back on June 19. We didn't take that one too seriously though. One can say ANYTHING to "Wall Street executives".
But THIS time, Mr O'Neill made his remarks to the August U.S. Congress!
What Mr O'Neill said was this:
"We have no assets" - in the U.S. Social Security trust fund.
Two Democratic Congressmen immediately took Mr O'Neill to task. (This is not a direct quote): "Of course we do - it's chock-a-block full of TREASURY BONDS!!"
True, said Mr O'Neill, but those aren't REALLY real assets: "...because the Social Security trust fund does not consist of real economic assets, we are left to rely on the federal government's future decisions to either raise taxes, reduce spending or increase borrowing from the public to finance fully Social Security's promised benefits"
Great thundering horny toads! The Secretary of the U.S. Treasury does NOT consider the debt paper he is in charge of rolling off the presses as being REAL ASSETS!! Of course, you know, he's right - but it is (how can we put this delicately) impolitic of him to say so - especially to a bunch of politicians sequestered in the Nation's Capitol.
U.S. Treasury bonds - and other Treasury paper of shorter maturites - just so happen to be the "reserves" behind every currency in the world. They are the "assets" that every Central Banker in the world spends time in the basement gloating over. Remember King Midas letting Gold coins run through his fingers with glee. Imagine a modern Central Banker doing the same. The difference is that what our modern financial hero is wallowing gleefully in are TREASURY BONDS.
TREASURY BONDS are the ultimate "glue" which holds the present world financial system together. But Mr O'Neill has just dropped a megaton bombshell. He has said, in public, that they are not "REAL ASSETS"!
We don't know which is funnier - the fact that Mr O'Neill would be silly enough to make such a statement or the fact that his statement has not (YET!) caused any consternation anywhere.
We can't help but wonder, however, how Mr O'Neill's fellow Treasurers will react to this startling statement when they all get together next weekend for the Genoa G-8 Heads of State Summit. Between them, they own literally TRILLIONS in Treasury debt, paper which Mr O'Neill has assured them are not really REAL assets at all. Do you suppose any of them will have the temerity to ask Mr O'Neill what he DOES consider to be a REAL ASSET?
No writer of "financial apocalypse" novels - like Paul Erdman - could come up with something so absurd. It takes "real life" to do that.
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
This week, Gold hardly moved - not only in $US terms but in terms of most major currencies. The exception was found in Latin America. Now it might be stretching things a bit to describe the Argentine and Brazilian currencies as "major", but Gold sure moved against them. There is a full blown financial CRISIS going on in South America right now. Argentinian overnight interest rates hit 300% on July 12. The Brazilian currency has been setting daily all time lows against the U.S. Dollar for a week.
As everyone who is anyone has diligently informed us, this is NOT a "crisis". Further, it bears no resemblance to the "Asian Crisis" of 1997-99. You may recall that when the "Asian Crisis" struck in July 1997, Americans ignored it entirely. President Clinton called it: "a glitch in the road". A year later, Russia defaulted and the entire financial house of cards almost blew away in the resulting winds.
No chance of that happening NOW! Argentinians, Brazilians, and many other citizens of Latin American nations are stampeding into U.S. Dollars and other U.S. "assets" - just like their Asian counterparts did at the start of THEIR crisis four years ago.
Some time ago, Alan Greenspan stated that there was no way he could define precisely what money was any more. He also said that there was certainly no way to know exactly how many U.S. Dollars were floating around out there. Now, Mr O'Neill has stated that Treasury bonds are NOT "assets".
It has been said: "Those whom the gods would destroy, they first make mad." We certainly don't think that Mr O'Neill could be classed as certifiably "insane" - but with statements like this - he is definitely a few shovels short of a full load.
With this kind of thing now going on in public, it is merely a matter of time before someone/somewhere takes Mr Greenspan and/or Mr O'Neill seriously and acts accordingly. Yes, we know that lots of individuals are already acting accordingly - they are protecting themselves with Gold.
But when somebody in financial authority starts taking these two American gentlemen seriously - AND ACTS ACCORDINGLY - the jig will verily be UP! That won't happen in the lead up to Genoa. It will happen AFTER Genoa. The only question remaining to be answered is - WHEN?
