"But no matter what happens in the short term, the delusions of omnipotence of the U.S. government have GUARANTEED the demise of their currency and their economy. Unless they radically change their policies, it's just a matter of time. Gold's sudden spurt is the clearest possible indicator that their time is running out."
(Gold Commentary - February 8)
"Delusions of omnipotence?" - Yes indeed. If you doubt it, just consider the swelling chorus from all sides that the U.S. downturn is coming to/has come to an end. We dealt with the numbers used to "prove" this contention in the current issue of The Privateer (#443). This week, the high point of the chorus (so far?) was reached on February 14 when the Dow managed to struggle back above the 10000 level (it closed at 10002) for the first time since January 10. And, of course, Gold has stalled at $US 300.
Gold has not kicked on from its $US 303.50 close of February 8. Neither has it fallen away from $US 300. It has simply been cycling all around that number all week. As you can see from the "course of trade" numbers above, volume is WAY down and the daily and indeed weekly trading range is very tight indeed. Gold is simply biding its time?
Biding its time for what? Biding its time for the fragile veneer of "confidence" which has been spread over Wall Street from one end to the other to crack. And crack it will, but more on that later in this commentary.
Two weeks ago, "world economic leaders" who usually meet in Davos, Switzerland were meeting in New York City. They were publically scratching their heads over why anyone would buy Gold while the Dollar is STRONG. Two weeks ago, the Dollar was still going UP. It has stopped going up, and is starting to give indications that it is ready to go DOWN.
A week ago, the G-7 meeting in Ottawa, Canada broke up with the usual "communique" which as usual said nothing at all. Needless to say, nothing about "Gold" appeared either in the communique or in the quotes which were published from the participants at the meeting. Equally needless to say, Gold would have been VERY high on the agenda, not of the official meeting, but of the discreet discussions for which the meeting was a highly visible prop.
Since the G-7 meeting, none of the crises have "gone away". Latin America is fast succumbing to the "Argentinian (currency) flu". Japanese corporate (but NOT sovereign) debt paper is facing yet more downgrades from U.S. "credit rating agencies". And those same Japanese corporations are "repatriating" capital faster and faster. The U.S. Dollar, in the meantime, is still going down - slowly but steadily.
It gets worse. The U.S. "coalition" against Mr Bush's "Axis of Evil", which only ever existed on paper, is cracking badly. The Europeans are apalled at what Mr Bush revealed as present U.S. "policy". And even that most faithful U.s. "ally", Great Britain, is expressing concern at the unilateral beligerance now being displayed by the Bush Administration.
On the financial front too, the Brits are breaking ranks. The Centre for Economic and Business Research, a London think tank, has released a report which estimates that U.S. corporate profits were overstated by 27% in 2001. The report came to this conclusion after "removing several accounting adjustments" from the calculations of U.S. corporations. The think tank estimates that if these lower profits had come to light last year, the Dow would now be trading in the 5500-7500 range.
On February 15 four days after this report came out, another bout of "accounting unease" hit Wall Street and the Dow fell away from the 10000 level which it had regained on the previous day. The problem is that Wall Street lives or dies on the "earnings estimates". But if the earnings themselves are a "crock", where does that leave the "estimates", and the brokerage houses who produce them?
The problem for Wall Street, the entire U.S. financial establishment, and therefore the U.S. financial system itself is that they are at risk of being seen as having foisted a gigantic "numbers game" on the investment world. They are at risk of breaking the "eleventh commandment". They are at risk of GETTING CAUGHT!
So is the U.S. government. Treasury Secretary O'Neill has just increased this risk by PUBLICLY asking Congress to hurry up and RAISE THE U.S. "DEBT CEILING"! Mr O'Neill figures that this MUST be done by mid March, or the Treasury will HIT the present ($US 5.95 TRILLION) ceiling.
Here's what Mr O'Neill had to say in a letter sent to Capitol Hill leaders on February 15:
"Failure to enact a permanent increase in a timely manner would only serve to undermine confidence in our government and our economy."
"Any delay could create uncertainty that would raise the cost of borrowing for U.S. taxpayers".
Where did Mr Bush find this guy? Consider this. According to Mr O'Neill, the only way that confidence in the U.S. government and economy can be maintained and the only way that U.S. taxpayers will be spared higher borrowing costs is to give the Treasury permission to borrow MORE. Mr O'Neill wants the present ceiling raised by $US 750 Billion.
No one, and certainly not Mr O'Neill, seems to have given a thought to the possibility that confidence in ANY government and economy would be badly shaken if it became clear that those in charge proposed to dive headlong into MUCH more debt. Don't forget, the U.S. is ALREADY by far the biggest net external debtor on earth. And don't forget that less than a year ago, the Bush Administration was glibly following the line of Mr Clinton and talking about ERADICATING Treasury debt in the next decade or so.
If you are looking for a possible catalyst which DOES have the potential to see Gold consolidate ABOVE the $US 300 level and then go onwards and upwards from here, we cannot possibly think of one to beat this one. Not even all out war in the Middle East equals it.
After nearly a decade of talking about paying off ALL its government debt, the U.S. government has not paid ANY of it off. Now, it wants to give itself permission to start borrowing big time again. How "confidence" in the U.S. economy and financial system can be maintained in the face of this is beyond The Privateer. Mr O'Neill and presumably the rest of the Administration (and even Mr Greenspan?) evidently think it can. Or maybe they are so sure of their superpower status that they can't conceive of anybody NOT having confidence in the U.S.A.
We are CERTAIN that the effort to halt Gold at $US 300, and preferably drive it back towards $US 280, will continue. We cannot say for sure that it won't succeed, but we don't think it will. Not this time. There are limits to credulity, and to moral cowardice. We'll see.