"The $US index has posted new highs regularly ever since its present bull market began in early 1995. To perpetuate its bull market, it must do so again. That means a high this time ABOVE the 121.21 level it set seven months ago."
"If it can do it, Gold's time has probably not yet come. If it can not, if the $US index fails at its July 2001 high, then Gold is set up to finally break out of its sub $US 300 prison."
(Gold Commentary - January 25)
The U.S. Dollar has not "failed" yet in its bid to add another upleg to the bull market it has been in since early 1995. In fact, the $US Index got as high as 120.59 (0.62 points below its 2001 high) on January 31. One more "good day" and the Dollar would have been there. But on February 1, instead of adding the 0.62 points necessary, the $US Index LOST 0.61 points to close the week at 119.98.
It was no kind of a fluke that Gold, which had been inching up despite the $US index strength earlier in the week, bolted upwards by $US 3.90 when the Dollar "took a breather" on February 1. While it is too early to say that the Dollar BULL has ended - one day does not a trend reversal make - it is NOT too early to say that the strain on the U.S. economy has reached a level which makes a Dollar trend reversal inevitable.
Take Mr Bush's "State of the Union" speech of January 29. No doubt you have heard of "delusions of grandeur". This, however, goes further than anything that Louis XIV of France would have contemplated at the height of his "Sun King" period. Mr Bush asserts that the U.S. is going to police the entire world. He asserts that a 9% increase in federal spending and the largest increase in defense spending in two decades is the "price of freedom". He asserts that with all this, the U.S. economy can be put back on a "growth" path and that taxes can be lowered. It was, to put it mildly, a very "assertive" speech - so assertive that it badly startled many U.S. political commentators (even Republican ones) and even had the odd member of Congress scratching his or her head about precisely how all this was to be simutaneously accomplished
Of course, Mr Bush sees his job as being to "assert". Since in his eyes, the federal government is omnipotent, the doing of the job presents no problems at all.
Unfortunately for Mr Bush, and fortunately for the rest of us, financial market participants, even those within the U.S., do not have quite the level of sublime confidence that the U.S. President stridently asserts. This is apparent if we examine the cogitations of the "world's economic leaders". Usually, these leaders meet in Davos, Switzerland. This year, they are meeting in New York City.
It seems that the gathered "economic leaders" were concerned about the "strange buying" of Gold this week, and especially the "big" upmove on February 1. They are scratching their heads over why anyone would buy Gold while the Dollar is STRONG. They have made the profound assertion that a rising Gold price "almost always" indicates depreciating currencies. They also assert that Gold's rise shows that investors are losing confidence in the monetary policies of Japan, Europe, and the U.S..
Up until very recently, the three economic entities where investors had NOT yet "lost confidence" in monetary policy were Japan, Europe, and the U.S.. To show how much confidence investors have lost in Japan, the Nikkei closed on February 1 at 9791. The Dow closed later that same day at 9907. That puts the Nikkei BELOW the Dow. If any reader of this analysis knows the last time THAT happened, please let us know, our data doesn't go back that far.
World (read U.S.) "economic leaders" have a very BIG vested interest in asserting that investors have "lost confidence" in Europe. Europeans have most certainly NOT lost confidence, as shown by the seamless manner in which the CASH Euro has made its debut. The Euro, to the great potential discomfiture of the U.S. (and of Mr Bush's grandiose plans for the U.S.) is a viable RESERVE CURRENCY. Can't have that. Mr Bush needs to wield the world's ONLY reserve currency as a necessary prerequisite for making the world safe for "freedom".
But wait, these "economic leaders" meeting in New York had the temerity to assert that investors might be "losing confidence in U.S. MONETARY POLICY! How dare they. And besides, how ridiculous. Everybody knows that the U.S. has a "Strong Dollar Policy"
The Fed isn't losing confidence in U.S. monetary policy. Having spend a week asserting that a U.S. economic recovery was right on the horizon, Mr Greenspan decided that he'd better not contradict himself by cutting rates yet again. So, the FOMC didn't when they met on January 29/30. Apparently, the Treasury plans to "auction" a record $US 60 Billion worth of debt paper next week, but of course that is necessary to "fund" Mr Bush's budget, which he presents to Congress on February 4.
But, said the "world economic leaders", something screwy is going on. Why else would Gold be RISING along with a rising U.S. Dollar. And why else did Gold's rise ACCELERATE when the U.S. Dollar STOPPED rising on February 1?
Apart from the interesting fact that GOLD - "yesterday's money" - has cropped up in a discussion amongst "world economic leaders", the confused state they claim to be in is laughable. They know precisely why Gold is coming to life. The U.S. government, UNDER Mr Bush, is planning to increase their deficits, increase their spending, increase their military activities, cut taxes, and maybe cure cancer and discover the fountain of youth while they're at it. All this is supposed to be done without raising a ripple on the surface of either the global financial system or the U.S. economy. WHOM DO THEY THINK THEY ARE KIDDING?
The last time the U.S. tried to do all these things at once was in the late 1960s and the 1970s. The result was that they had to renege on their promise to redeem Dollars for Gold (in 1971). After that, the Dollar did indeed plummet, and Gold in Dollar terms skyrocketed. And all that happened while the U.S. was still the world's number one global CREDITOR.
Now, the U.S. UNDER Mr Bush proposes to do it again, with the stakes MUCH higher and the U.S. as the world's number one global DEBTOR. Here is a fact - IT CAN'T BE DONE. Here is an "assertion" - global markets are slowly stirring in the dawning realisation that it can't be done.
There's nothing strange about any of this, except the fact that it has taken so long for "investors" and "global economic leaders" to notice it. Yes, attempts will still be made (just as they were in the 1970s) to hold Gold DOWN. Yes, the means for holding Gold DOWN are much more sophisticated now than they were then. But the economic and monetary situation is also MUCH worse than it was then.
We called the Gold Commentary last week: "Another Moment Of Truth For the U.S. Dollar". These "moments of truth", despite all the fantastic fabrications of all the "global economic leaders", are going to come with increasing regularity. Any ONE of them could prove all the catalyst Gold needs. Are you ready? Stay tuned.