"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."
(Gold Last Week - March 15)
All of a sudden, after doing almost nothing at all for two weeks, $US gold has awakened. It rose $US 4.50 on March 22 to regain its "pre Bank of England Gold Auction levels" just below $US 300. Well, it had to happen sometime. Gold has established an almost one month old trading range between $US 290 - 300. It closed at $US 290.10 last week. This week, Gold cycled around the $US 292-293 level until its $US 4.50 rise on Friday. So, $US 290 has held on the downside, now we will see if $US 300 will hold on the upside.
But, besides the things that everyone talks about, what's happening?
Two things, as we see it. First, the tried and tested methods of holding down the Gold price are slipping. Second, the financial world is about to get a GIANT "wake up" call about the true status of U.S. finances.
Looking at the first item, one need look no further than the inexorably FALLING Gold lease rates which have been a feature of the 2 1/2 weeks since the Bank of England held their LAST Gold auction on March 5. By the way, on March 5, spot future Gold closed in New York at $US 297.10. It had not been above that level since, until March 22 when spot future Gold rose $US 4.50 to close at $US 297.60.
Here's the record of Gold 3 and 6 month lease rates since March 5 compared to the yields on 3 and 6 month Treasury notes:
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See how lease rates on Gold are inexorably falling, while Treasury yeilds on equivalent length paper are inexorably rising. By the way, the one month Gold lease rates has fallen from 0.449% to 0.300% over the same period. That 0.300% one month lease rate for March 22 is the lowest we have on data going back to the beginning of 1998. Lease rates on Gold are practically non existant. This is a desperate attempt to keep the "Gold carry trade" alive.
Here's a quote from the Comex Gold trading report on Reuters for March 22:
"Eleven official U.S. interest rate reductions last year nearly eliminated the spread between U.S. deposits and low gold lease rates, thereby shrinking gold's forward premium -- called contango -- and encouraging many producers to scale back their hedge activity."
Contangos remain very narrow even though market yields are edging up in anticipation of rate increases starting soon in the wake of the Federal Reserve's decision this week to shift to a neutral stance as the economy shows broad signs of recovery."
" 'Contangos are coming back now that dollar interest rates are rising, so that might entice some of the usual suspects back to the market,' said another bullion dealer."
"Contangos" are indeed "coming back", as the data in the table above makes clear. Gold lease rates are nearly down to the level of Japanese debt paper. Meanwhile, the yields on three and six month Treasury paper are at their highs for the year so far. On paper, there is money to be made from leasing Gold, selling it for Dollars, and using the Dollars to buy the Treasuries. But it's not happening. Gold has merely been frozen in place for two weeks, and now it is rising again.
Going back to the Reuters quote, one can ask the question as to what was instrumental in "encouraging many producers to scale back their hedge activity"? Was it the shrinking contango? Or was it a growing suspicion that Gold was about to head higher, possibly much higher. If one accepts the word of the Gold producers who have gone public with their decisions to scale back hedges, the second consideration was paramount.
Two things are certain. First, Gold lease rates CAN'T go much lower. Second, the attraction of Gold "hedging" is fading - fast. So far this time, diving Gold lease rates have not pushed the Gold price down, they have merely prevented it from going up - up until March 22.
Now we come to the second consideration - the giant "Wake UP!" call about the true status of U.S. finances. Consider this quote from our Gold commentary last week:
"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."
(Gold Last Week - March 15)
On Wednesday, March 20, the U.S. Congress adjourned until next month. They did so WITHOUT passing the $US 750 Billion increase ($US 5.95 TRILLION to $US 6.70 TRILLION) in the debt ceiling which the Bush Administration has been stridently requesting. As of March 21, the Treasury reported its debt "subject to limit" as being $US 5.9385 TRILLION. Right now, the Treasury is $US 11.5 Billion below its debt ceiling.
Yes, Treasury Secretary O'Neill has stated that he can start scooping funds out of government workers' pensions just like Mr Rubin did in 1996. Mr O'Neill says that this will keep the debt below the ceiling until April 15, and then the taxes will start rolling in to give him some more breathing space. He may well be able to do this too.
But at some point, the ceiling is going to have to be raised. The longer the raise is postponed, the more attention will be focussed on the problem. And as that attention increases, it is bound to dawn on more and more individuals, both inside and outside the U.S., that all the talk about budget surpluses and the paying off of Treasury debt which the Clinton and Bush Administrations have indulged in ever since the last debt ceiling rise in August 1996 is nothing more than a crock of odiferous material.
Treasury debt is up $US 450 Billion in 4 1/2 years. Now, Treasury wants to see that and raise it by $US 750 Billion more. So much for paying off debt, or running budget supluses.
There is the big lie, and then there is something bigger. That is the mess which occurs when the big lie is exposed. That is what the U.S. financial system is facing, and that is what the legions who are tasked with keeping Gold below $US 300 are facing. It is, to put it mildly, a very tough ask.