"The only thing they can do is to maintain the facade of "economic recovery" as long as possible, and hope that no one notices the massive acceleration of debt that is being piled up to maintain it."
(Gold Last Week - March 1)
That is what they are doing, and boy are they doing it hard. On Friday, March 1, the Dow climbed 263 points. On Monday, March 4, it climbed another 218 points. In Japan, the government has just announced THEIR economic results for the fourth quarter of 2001. The Japanese economy contracted 1.2%. No matter, since February 20, the Nikkei has risen from 9834 to 11885 - that's 2051 points or almost 21%.
Everyone knows that as of the start of the new Japanese financial year on April 1, Japanese bank depositors are going to lose the "unlimited" guarantee they now have on their deposits. Everyone knows that President Bush has just slapped tariffs on steel, and this will hurt Japan more than almost any other nation. Everyone knows that the Japanese government has piled up debts in their more than a decade of recession fighting that are now somewhere between 130% and 150% of Japanese GDP. Everyone knows all this, and yet an increasing avalanche of foreign investment (much of it from the U.S.) is flooding the Japanese stock market.
U.S. traders have even been quoted on Reuters as saying that they expect an imminent Japanese recovery based on the new-found strong "growth" of the U.S. economy. They say that this growth will spur Japanese exports! This is truly amazing, coming as it does just days after President Bush slapped tariffs on steel.
The most bizarre "analyses" are coming out. In the space of a week, Mr Greenspan "corrected himself". On February 27, he gave a speech stating that he could see increasing signs that a recovery may be imminent. A week later, he gave a speech stating that the recovery was well underway. Traders, who had been noting a massive sell-off in Treasuries (and a significant fall in the U.S. Dollar), interpreted all this as fear that the Fed might be about to raise U.S. interest rates. With the government rushing headlong into deficit spending? We'd like to see that. The Fed won't until they HAVE to, and when they HAVE to, it won't have much to do with "cooling down" economic growth.
But for the moment, the new economic "paradigm" is firmly on top. This IS the recovery. All doubt must be brushed aside. The fact that ALL of the firming economic statistics are due to a MASSIVE increase in government deficit spending is deemed irrelevant. The fact that consumers are borrowing twice as fast as their incomes are growing is deemed equally irrelevant. The fact that Mr Bush has just done EXACTLY the same thing as the Hoover Administeration did in 1931 is totally ignored. Everything is being ignored, except that government accounting practices have given birth to a slew of encouraging economic statistics. Strange how no one EVER questions government accounting practices, especially when just weeks ago, corporate accounting practices were threatening to sink U.S. markets terminally.
What we have here is a "grace period" for U.S. and world economies and markets. The grace is truly "amazing" in that it flies in the face of any semblance of economic or financial reality. But to this point, it is "working", and the result has been resurgent world stock markets and another failure for Gold at the $US 300 level.
In the 1930s, after the world economy had collapsed, an American reporter published a book he called "Oh Yeah!". It was simply a compilation of quotes from government officials, investors, bankers, and other financial potentates all telling everyone who would listen that the U.S. economy had turned the corner and happy and prosperous days were here again. That reporter is almost certainly no longer with us - but the times are certainly right for a sequel. The message is the same, the messengers are the same, and the end result will be the same.
In the face of this barrage of economic propaganda, something had to give. The U.S. Dollar is shaky. Treasury debt is suffering a much bigger bloodbath on the downside than the upside being enjoyed by U.S. stock markets. And Gold has once again fallen away from $US 300. This time, it happened on March 5, BoE Auction day, as soon as London had closed for the Day. On Monday, the London AM fix was $US 299.55. On March 5, the London PM fix was 297.80 - well above the "settlement price" at the Auction. Gold reached $US 299.55 in early New York trading, but as soon as London closed on March 5, Gold fell away. On Friday, the London PM fix was 289.15. The spot future Comex close on Friday was $US 290.30 - Gold's lowest close in New York since February 4.
On its way up to $US 300, Gold rose with a rising U.S. Dollar. This week, Gold has been falling with a falling U.S. Dollar. When the Dollar recovered on March 8 - the $US index recovering 1.20 points, the exact amount of its fall on the previous day - Gold scarcely moved.
Now, there are three main items waiting in the wings. There is the international reaction to Mr Bush's steel tariffs. There is the leadup to the end of the Japanese financial year at the end of this month. And there is the countdown towards the U.S. government lifting its debt ceiling. The U.S. economic stimulus package has been almost unanimously passed by the House of Representatives. It will be passed by the Senate next week.
The Bush Administration is STILL projecting $US 1 Trillion in government budget surpluses over the next decade, even though some "short term deficit spending" is "necessary". I'm sure the late and unlamented executives at Enron would have LOVED to be able to get away with a statement like that. Mr Bush has pledged a "ten point plan" designed to protect U.S. investors from any future "Enrons". Who will guard (against) the guardians?
Gold's uptrend remains intact, in all major currencies. Euphoria is a strange thing. Its duration cannot be predicted and neither can the precise way in which it dissipates. We know that the view of the world financial system held by most people and the actual state of the system has seldom if ever been more at variance.
In the midst of it all stands Gold, right in the middle of an uptrend which has now been going since last April. If we had to nominate a key which would push Gold back towards $US 300 again, we would pick the announcment of the lifting of the U.S. Debt ceiling. But right now, there is a literal smorgasbord of potential triggers to choose from.
Meanwhile, don't forget, this recovery euphoria is only two weeks old, at most. The situation in the REAL world, with Mr Bush's tariffs, the potential full scale war between Israel and the Palestinians, the recent military setback in Afghanistan, the end of the Japanese financial year, the list goes on - is steadily getting worse.
We here at The Privateer have been watching all this for a LONG time. We didn't think that there was anything left that could amaze us. We were wrong. A large part of the world has taken leave of their senses to an extent we have never seen and seldom heard of before.