Here we are in the midst of the "dog days" of August, at least they are "dog days" for the majority of the world's population which lives in the northern hemisphere. August is "holiday month", and millions of people are taking the opportunity to get a little rest and recreation in before the world crashes back into gear after the Labor Day weekend in the U.S..
Over at the European Central Bank (ECB), activity has come almost to a stop while the Euro-potentates take the month off. The ECB last met to consider European interest rates on August 2. They don't meet again until August 30. Not that the Europeans need to do much about rates at present, with the Euro regaining lost ground fast against the U.S. Dollar.
Unfortunately for those in charge of monetary and financial shenanegans in the U.S., August is proving a most (you should pardon the expression) "taxing" time of year. Treasury Secretary O'Neill is not having to work too hard. He just keeps repeating the mantra: "Of course the U.S. has a STRONG Dollar policy!" We have no doubt that Mr O'Neill has a "strong Dollar policy". The problem is that fewer and fewer people in the rest of the world share it.
And then there is the Fed, and Mr Greenspan, all of whom are gearing up for a Federal Open Market Committee (FOMC) meeting on Tuesday, August 21. We do NOT envy them. Times were so much easier just a few months ago. Back then, every time the Fed cut rates the Dollar went HIGHER. The "reasoning" behind that was that the Fed was "doing something" to re-ignite U.S. economic growth - so let's get some Dollars so we can cash in on it when it shows up.
Of course, that "growth" has NOT shown up. And with the U.S. now approaching the "third quarter", it is nowhere to be seen. It may be a coincidence that the $US index began to fall on July 6, about a week after the last FOMC rate cut. We don't think so. It may be a coincidence that the $US index has accelerated its retreat since the recent Genoa G-8 meeting - at which the U.S. representatives refused to even discuss the Dollar. We don't think so.
What we DO think is that the fall of the U.S. Dollar (nearly 7% since July 5) is making life MUCH more difficult for the FOMC. EVERYONE (and we mean EVERYONE) expects another rate cut on August 21. The Fed pretty well HAS to come to the party. U.S. stock markets are wobbling badly. If the Fed DOESN'T cut rates, the potential for a massive swoon is HUGE - given the fact that a refusal by the Fed to cut rates would be an admission that rate cuts won't help the current situation.
And what if the Fed DOES cut rates? Well, the old argument that the rate cuts were bringing forward the day of economic rebirth in the U.S. is getting a bit ragged. We have already had lots of rate cuts, there has been no re-emergence of economic "growth". Very few on Wall Street or anywhere else seems to have noticed that the Dollar actually started to fall within DAYS of the last cut. The momentum is accelerating, and another rate cut now could very easily speed it up even more.
But what else can the Fed do - without admitting that DRASTIC steps must be undertaken to rescue the U.S. economy? Yep, the Fed is all but certain to cut rates when they meet on August 21. The U.S. can certainly live with a lower Dollar, although Mr O'Neill may end up looking a bit silly. The problem is - CAN THE REST OF THE WORLD LIVE WITH A LOWER U.S. DOLLAR? The answer to that one, given the GIGANTIC pile of U.S. financial "assets" held by the rest of the world, is almost certainly NO!
We go into this question in much greater detail in the current issue of The Privateer (#431) - which will be published on August 19.
If you are enjoying an August holiday while reading this, make the most of it. The "dog days" are not going to last much longer.
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.
All "bubbles" burst. But what to "elbbubs" do? Quite often, they eventually turn into bubbles. But there is a large intervening sequence of events before an ellbub can become a bubble. That sequence of events is fondly known as a BULL market.
Please take a good look at the daily chart comparing the $US index and the $US Gold price. Is the $US index in a bear market yet? Is the $US Gold price in a bull market yet? Just looking at this (short-term) chart, the temptation would be to answer a resounding YES! to both questions
OK, now take a good look at the weekly chart comparing the $US index and the $US Gold price. Is the $US index in a bear market yet? Is the $US Gold price in a bull market yet? No to both questions. Would you say that, given the present direction of both charts, a bear market in the Dollar and a bull market in Gold is poised to appear in the near future? The answer is a resounding YES!
Since the $US Gold price topped out in early 1996, the world economy has NEVER ONCE been in a position where a financial crisis was not going on somewhere. Since 1996, we have seen financial crises in every part of the world EXCEPT ONE. No one has had to step in from the outside to rescue the U.S. DOLLAR. Just as well, there's no one big enough to do it.
The last time that the U.S. Dollar had to be rescued (in the same manner as Asian currencies had to be rescued in the late 1990s and South American currencies are being "rescued" at present) was at the end of the 1970s. It to 20% plus U.S. rates to do it.
Such a "cure" today would be far worse than the disease. The Privateer has stated on many occasions that the one development that was SURE to bring about a revival of the $US Gold price would be a concerted dive in the U.S. Dollar itself. We are on the brink of witnessing just such a dive.
That is why $US Gold is looking so good technically. That is why the outcome of the FOMC meeting on August 21 is so potentially dangerous, no matter what the Fed decides to do. And that is why what we are going through now is VERY likely to prove to be the last few days of calm before the storm.
