"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."
(Gold Last Week - March 8)
This week, $US Gold has closed $US 0.20 lower than it did last week. The only new development in Gold is that the $US 290 level has held once, and now it is being tested again.
The title above is an old adage, but pertinent to the present global financial situation. Here's another example. There's an old game where a piece of thin cloth is stretched over the top of a jar and a coin placed right in the middle of it. The players take turns burning a small piece of the cloth away. The loser is the one who finally burns in a place which collapses the cloth and causes the coin to fall into the jar.
Right now, the cloth is full of holes but it is still intact. The question is how many more holes can be burned in it before the cloth gives way and the "penny drops".
Japanese Gold buying was a major feature in Gold spurting up to the $US 300 level and then staying there for five weeks. The Japanese government is planning to end unlimited deposit insurance on April 1, and Japanese bank depositors were and still are buying Gold rather than leaving their deposits at risk. Up until the end of February, there were no "conventional" investments in Japan which did not carry a grave perceived risk.
Then, at the end of February, Japan outlawed short selling on their stock market. Right on cue, the Nikkei leaped. The initial impetus was, of course, short covering, but the market continued upward on new and feverish foreign buying. All of a sudden, Japanese depositors DID have a domestic investment which was appreciating. Well, the Nikkei has plateaued this week. Worse, it has been stripped of "captive buyers" in the event of another downturn. There are no "shorts" left to take profits by BUYING stocks if/when the market resumes its downward path.
The U.S. Dollar is inexorably falling, slowly but surely. Along with this, the yields on Treasury debt paper are inexorably rising. As far as Americans are concerned, this is simply because of the "recovery" and the increasing expectation that the Fed will start to raise rates later on this year. But outside the U.S., many investors have noticed the fall of the Dollar, and many have also noticed the HUGE increase in government deficit spending coupled with the undiminished appetite for corporate and consumer debt. U.S. Treasury debt yields are having a "risk premium" slowly built into them. That shows clearly an increasing expectation of a possibly much weaker U.S. Dollar in future.
Raw material prices are surging. Oil prices are up sharply. The CRB index has risen 6.1% over the past three weeks, much further than the Dollar has fallen on a $US index basis over the same period. Base metal prices are up, basic building material prices are up, agricultural commodity prices are up. The only "commodities" which are not up are Gold and Silver.
The U.S. has reportedly returned to economic "growth". What is "growing" is DEBT. The increases in quarterly GDP are almost exclusively on the back of increased consumer, corporate, and especially government borrowing. All of these are being praised as virtues, especially the blowout in government deficit spending which is marketed as being patriotically vital to protect Americans and everyone else from terrorism. .
There are many other potential "holes", but there is one BIG one which remains a "sleeper". This is the necessity to raise the U.S. Treasury's "debt limit". The last time that the limit was raised was in August 1997. The very concept of a "debt limit" to Treasury spending has since slipped right of investment radar screens. The U.S. government has been bellowing about surpluses ever since 1998. In the face of such "surpluses", how could it ever be necessary to raise the debt limit again?
The debt limit increase of August 5, 1997 was $US 450 Billion - raising the limit to its present level of $US 5.95 TRILLION. August 1997 was 4 1/2 years ago. That means that on average, the debt of the U.S. Treasury has increased by $US 100 Billion a year over that 4 1/2 year period. Remember, right up until the middle of this year, the U.S. government was proclaiming annual budget surpluses and boasting of their plans to pay off ALL U.S. federal government debt. The amazing thing is that a whole lot of people actually believed them!
On March 14, the Treasury's debt subject to limit hit $US 5.932 TRILLION. That leaves $US 18 Billion leeway under the present debt ceiling. The Bush Administration and the Treasury want the limit raised by $US 750 Billion, to $US 6.7 TRILLION. So far, the Congress, just as it did in 1996-97, is dragging its heels. The Bush Administration wants the ceiling raised NOW. The Congress wants to drag the process out, hoping they can get through this month and then rely on April tax gathering to keep the ceiling at bay until closer to the Congressional elections in November.
But what NO-ONE in government or on Wall Street is considering is the possible impact of a U.S. debt ceiling rise, or a funding impasse while political games are fought, on the rest of the world. Wall Street analysts see the debt ceiling as a "non event". Political commentators see it has having minimal impact because Robert Rubin, Treasurer in 1996-97, set lots of useful precedents in his machinations last time. All of these were deemed "unthinkable" before he used them, but now they have been used, and seen to "work", and can be used again.
Very few inside the U.S. would imagine that the recent weakness of the Dollar and the surge in Treasury yields might have anything to do with the U.S. Treasury bumping up against their debt limit. Even fewer would imagine that the rest of the world would start to see ALL U.S. investment markets, including the market for U.S. Dollars, as being increasingly risky given another increase in the debt limit. The blindness is almost complete.
The U.S. is the world's biggest external debtor. It runs the world's biggest trade and current account deficits. It has a President who can slap steel tariffs on one day and talk about the U.S. as the champion of "free trade" the next. It's political and military interference with the rest of the world is running amok. It's currency has long been seen by both Europe and Asia as unsustainably overvalued.
It is now going to give itself permission to borrow nearly a TRILLION more Dollars, without giving a thought to any possible repercussions to its own financial system or to its currency. In short, it is in the process of burning what may well be the last "hole in the cloth", or loading what may be the last straw on the camel.
Whenever it occurs, the raising of the Treasury's debt ceiling will utterly explode the myth, so assiduously fostered by both the Clinton and now Bush Administrations, that the U.S. was running budget surpluses and well on the way to paying off their government debt. That has potentially shattering consequences, not least to the future of keeping Gold below the $US 300 level. It is one thing to be "profligate". It is quite another to be SEEN to be "profligate". Just ask the directors of Enron what the consequences of THAT are.