"As history shows, the capacity for human beings to hide their heads in the sand is very large, but it is FINITE. 2002 will define the limits of this capacity. The sub $US 300 Gold price, which has been the only constant of the global financial system over the last four years plus, will NOT survive this year."
(Gold Last Week - January 4, 2002)
Right now, you might be able to get pretty good odds that the sub $US 300 Gold price will not survive this MONTH. At its close of $US 287.70 on January 11, spot future Gold is only $US 12.30 below that $US 300 level - and $US 5.60 below its 2001 high of $US 293.30 set on September 26.
Take a look at the weekly trading statistics above. Besides the good leap in the spot future price, you can see a marked increase in daily volume, and an interesting progression on the open interest numbers. Gold had two big "up" days this past week. It rose $US 4.50 on January 9 - while the open interest fell by 4,450 contracts. Gold rose another $US 3.70 on January 10 - but this time, the open interest ROSE by 9,020 contracts. On January 9, open interest fell (on short covering?). On January 10, open interest rose by more than twice as many contracts as it fell the previous day. More short covering maybe, but more than made up for by new contracts, most of them almost surely on the LONG side. Over the week, while the Gold price rose by $US 8.50, open interest rose by 11,800 contracts, or 10.2%.
What do you get when you "cross" an Argentinian debt default and GIGANTIC currency devaluation with an ENRON Congressional investigation with an incipient Japanese banking system collapse with a looming increase in the U.S. debt ceiling? Well, you get a number of things, but one of them is evidently a higher U.S. Gold price. What you have not "gotten" - yet - is a lower U.S. Dollar. Gold has been rising but the U.S. Dollar has NOT been falling. Not yet.
The global financial situation is almost fantastically dangerous, and we are not yet half way through the first month of 2002. So dangerous is it, indeed, that even Wall Street is beginning to take notice. While predictions for an imminent U.S. economic "recovery" still abound, the market action does NOT show that the Wall Street soothsayers are being taken very seriously
The Dow went up - until January 4. This week, it has retraced all those gains, slipped below the level at which it started the year, and much more ominous, it has slipped back BELOW 10000. On January 11, Treasury yields PLUMMETED as U.S. investors interpreted a Greenspan speech and a lower than expected December PPI (it FELL -0.7% - the "expectation" was -0.2%) to bet the farm on yet another U.S. rate cut when the FOMC meets on January 29-30.
Mr Greenspan, in his speech, did not seem as "confident" of an economic turnaround as Wall Street and Washington profess to be. Argentina is, of course, utterly prostrate. The troubles there cannot be quarantined, they will affect the rest of Latin America, just as the problems in Thailand affected the rest of Asia in 1997. The difference is that Thailand, and the rest of Asia, was bailed out by the IMF in 1997-98. Argentina, so far, has NOT been bailed out, leaving them no choice but to default and devalue
Please note this carefully. It was NOT actually the Asian nations which were bailed out in 1997-98, it was the banks which had lent to the Asian nations. Actually, the ultimate recipient of IMF largesse was the U.S. Treasury itself, because the IMF bailout made it possible for the Asian nations to service their debts to Western banks WITHOUT having to deploy their currency reserves. Those reserves were, and are, almost entirely composed of U.S. Treasury debt paper.
As 2002 begins, we have another brewing global financial crisis well underway. But THIS time, the IMF is NOT stepping into the breach. And this time also, the U.S. does NOT have any leeway to "save the world" by lowering rates and injecting "liquidity". Rates are already almost non-existent in REAL terms. U.S. "liquidity generation" climbed right off the scale in the wake of nine-eleven.
The real cost of this is that the U.S. government, which has spent the past five years boasting of budget surpluses, is PUBLICLY going back into deficit spending. The U.S. had some "credibility" during the Asian crisis, it was running official budget surpluses. Now, it is running official budget DEFICITS and plans to borrow $US 750 Billion (raising the debt ceiling from $US 5.95 to $US 6.70 TRILLION in the process) between now and fiscal 2003.
As we enter 2002, the shear between financial appearance and financial reality has become too big to bridge. There are too many things "going wrong". The assurances of "business as usual" are too hollow to command attention. So far, the only girder underpinning the global system which has yet to slip is the exchange value of the U.S. Dollar. But now, Gold is going UP against the U.S. Dollar. If it keeps doing so, the U.S. Dollar is going to start falling - SOON.
This July, the U.S. and the European Union have a series of meetings scheduled which will have on their agenda the "monetary politics" which will come to exist between the U.S. and the E.U. and between the U.S. Dollar and the Euro. We discuss and analyse these meetings in depth in the The Privateer's first issue of 2002, to be published on January 13.
Whether the present global system under which the Dollar is sole reserve currency can hang together until July is a moot point. But if it does, and these meetings do not produce a plausible procedure for a TWO reserve currency world, the present global financial system will NOT hang together for long once the meetings have been held. That is one MAIN reason why we stated in the last weekly Gold Commentary that 2002 would be the year when Gold regains $US 300.
It would not surprise us at all, however, if Gold regains $US 300 before the end of this MONTH. Stay tuned, 2002 is proving to be as interesting as we thought it would.