While it is still hot in many parts of the U.S., as far as financial markets are concerned, the "summer" is now officially OVER. This is the Labor Day weekend in the U.S. (and Canada). This year, as seldom before, the holiday is singularly apt for both Wall Street and the Potentates in the Fed and Treasury who run the U.S. financial system. There's a hell of a lot of work to do!
Second quarter U.S. GDP "growth" has been officially revised down to 0.2%. With a month (September) remaining in the third quarter, it will take some mighty efforts on the part of the "Wise men" (you know, the statisticians) in the Treasury to come up with a positive number when third quarter "growth" (or lack of same) is announced.
But, in reality, almost everybody knows that there isn't any "growth" going on anywhere, although most are not yet ready to admit it. Look at Japan. Not having the wherewithal to start a war, Japan has suffered through an economic catastrophe which is now approaching its 12th anniversary. On the last trading day of 1989, the Nikkei closed at 38,876. On September 7, 2001, it closed at 10,713. That's a fall of 72.44% spread over more than a decade.
The Nasdaq, at its present level of 1805, is down 64.24% from its all time high. That's nearly as bad as the Nikkei, but the Nasdaq crash is only 17 months old. The Japanese disaster is 140 months old. Stoical people, the Japanese. Americans (or Europeans or Aussies or almost anyone else we can think of) would never have stood such a long drawn out debacle.
In fact, the Japanese debacle is the only one which beats (handily) in duration the long drawn out bear market in Gold that has been a feature of these pages ever since we began to write them in early 1996. $US Gold hit a spot future close of $US 414 on February 2, 1996. It closed at $US 275.10 on September 7, 2001.
Right now, $US Gold is $US 139 or 33.66% below where it was on February 2, 1996. Aussie Gold, on the other hand, is only $A 32 or 5.8% below its level of February 2, 1996. There are several things you can see from this comparison, but one stands out. Gold denominated in Aussie Dollars doesn't matter. Gold denominated in U.S. Dollars DOES matter - because the $US Gold "price" is the one that EVERYONE in the world watches.
As long as Gold languishes in $US terms, Gold is "weak" - no matter what it does in terms of any other currency. As long as Gold is "weak", there is no unmanageable threat to the U.S. Dollar, and besides, there is no "inflation". And as long as there is no "inflation", the chance remains that just one more Fed rate cut will rescue the situation. That's the mantra. But lowering rates didn't work for Japan - and it should have by now become pretty obvious that it is not going to work for the U.S. either.
Ask yourself this question. Can you envisage a situation in the foreseeable future in which the Japanese stock market (or the Nasdaq, for that matter) could regain its highs? We can't either. The Nikkei has been in a bear market for more than a decade, the Nasdaq for about a year and a half.
Now Gold was in a bear market for about 3 1/2 years - from February 1996 to August/Sept 1999. Ever since then, for the past two years, it has been in a long, drawn-out, and occasionally quite rambunctious bottom formation. The bear ended two years ago. We are still waiting for the bull. But we here at The Privateer can EASILY envisage a situation in which Gold can regain its 1996 highs, and go a lot higher still. All it would take is for Wall Street to throw in the towel, and for the U.S. Dollar to start downstairs in earnest.
Wall Street is now hanging by a thread, and so is the U.S. Dollar (for MUCH more on the Dollar - see the upcoming issue of The Privateer - out on September 2).
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 Japanese Finance Minister has just come out and re-defined the entire global currency problem this week. The problem is not a "strong" U.S. Dollar. The problem is a "weak" Euro. He has also come out and said that CO-ORDINATED currency intervention might be "necessary" to help restore "correct" foreign exchange levels.
This is a RED LIGHT warning of the onset of a U.S./Europe/Japan currency crisis - of proportions which entirely dwarf the "Asian Crisis" which blew up a little over four years ago.
The Dow is back below 10000. Japan is vanishing off the investment radar screens and threatening to take the rest of Asia with it. The ECB has cut rates (by 0.25%) because they knew that if they didn't, they would cop the blame for whatever is to come. And this weekend, the world's Central Bankers are meeting in Jackson Hole, Wyoming. So far, the only ruminations coming out of Mr Greenspan concern "capital gains". WHAT CAPITAL GAINS?? Capital gains on U.S. housing.
Suffice it to say here that the world is staring into the abyss of a global recession and that most of it is already IN IT. In such a situation, it is absolutely inevitable that Gold will increase its attractiveness inexorably as protection against what is to come.
Right now, the $US Gold price continues to consolidate. But in the weeks to come, things can't get too much worse without the $US Gold price getting a whole lot better. Stay tuned.
