"So, $US 290 has held on the downside, now we will see if $US 300 will hold on the upside."
(Gold Last Week - March 22)
$US 300 is the Maginot Line of the financial PTB (Powers That Be) of the world. To understand why, it is necessary to take into account the whole history of Gold "trading", specifically in the U.S.. In this context, remember that it was forbidden for Americans to own Gold between 1933 and the end of 1974. Also remember that up until August 15, 1971, the world's reserve currency, the U.S. Dollar, was DEFINED as 1/35 oz. of Gold.
When President Nixon refused to redeem Dollars from any source in Gold in August 1971, he cut the final tie between paper money and Gold. The U.S. Dollar was not defined as anything. One U.S. Dollar equals one U.S. Dollar. The result was predictable, and it was predicted by many financial writers of the day (Harry Browne, Jim Blanchard, Jim Dines, Jerome Smith, Howard Ruff, Harry Shultz, Doug Myers, et al). By the time that Americans were once again allowed to own Gold, on January 1, 1975, it took $US 195 to buy one ounce of Gold. Gold had already appreciated by 457% ($US 35 to $US 195). Gold reached a peak (on closing prices) of $US 850 per ounce in January 1980. That rise was 336% ($US 195 - $US 850).
The 1970s were defined as being "inflationary" - because the prices of consumer goods (notably oil) rocketed, as did the prices of physical investments, notably Gold and Silver. The rocketing "prices" of Gold and Silver hit especially hard. Please remember that over the whole history of the U.S. prior to 1971, there was no "price" for Gold or Silver. Gold did not have a "price" of $US 35 per ounce. The Dollar WAS 1/35 ounce of Gold. The Gold was the MONEY. The Dollar was a paper "receipt" for money. Up to 1933, ANYONE could redeem the REAL money, the Gold, at a rate of $20.67 for one ounce of Gold. Between 1933 and 1971, foreign governments could redeem the REAL money, the Gold, at a rate of $US 35.00 for one ounce of Gold. After August 15, 1971, no-one could REDEEM the MONEY, the Gold, for any amount of Dollars. All they could do (Americans from 1975 onwards) was to buy Gold with Dollars. Americans were not used to that in the 1970s. So as the number of Dollars needed to buy one ounce of Gold rocketed, the impact was IMMENSE.
It was the rocketing price of Gold, above all other considerations, which gave the 1970s their now historical definition as a decade of "inflation". And so they were. Government debt over the period rose from about $US 400 Billion to $US 1 TRILLION.
But the two decades since 1982, during which the great U.S. stock market "inflation" has taken place, are NOT identified as being decades of "inflation", except by those who understand the term. Inflation is an increase in the stock of money. With the Dollar (and all other currencies) divorced from Gold, the stock of money is "backed" by government debt. An increase in government debt is, therefore, the fundamental fuel for inflation. In the years since 1982, U.S. government debt has increased from $US 1 TRILLION to $US 6 TRILLION.
Please consider this. In the period from 1789 when the Constitution was ratified until 1971 when the U.S. scrapped the Constitution by repudiating Gold, the U.S. government accumulated about $US 400 Billion in debt. Of that total, about $US 220 Billion was accumulated in a total of SEVEN years (1917-18 WWI and 1941-45 WWII). In the just over three decades since 1971, a total of $US 5.6 TRILLION Dollars has been accumulated. In terms of total U.S. government debt, 93.3% has been accumulated since 1971. There have been no DECLARED wars fought by the U.S. since WWII. Therefore, in terms of PEACETIME U.S. government debt, 97% of all government debt accumulated since 1789 has been added since 1971. This is the TRUE measure of the inflationary impact of separating the Dollar and Gold.
And, of course, during the period since 1982, generally regarded as being "non-inflationary", government debt has climbed from $US 1 TRILLION to $US 6 TRILLION. That's 83.3% of total debt.
On U.S. markets, the past 20 years has been defined by two phenomena. First, ever increasing stock markets - up to 2000. Second, a FLOOR of $US 300 under the $US Gold price - until late 1997. In the global financial system, the past 20 years has been marked by ever increasing and intensifying financial crises, none of which have yet been finally resolved. They have not yet been finally resolved because they have not yet hit the FOUNDATION of the global financial system - the U.S. economy and the U.S. Dollar.
Thus far, the U.S. financial system has staved off every crisis the rest of the world has thrown at it, up to and including the decade plus DEPRESSION in Japan. The one exception to this is the crash dive of the biggest bubble of the entire two decade extravaganza, the Nasdaq.
From 1982 to 1987, there was a huge global bull market culminated by the biggest stock market crash of all time on October 19, 1987. At the end of the 1980s, annual U.S. budget deficits peaked (at $US 400 Billion plus) and the Japanese financial system began its death spiral. In the early 1990s, there was a short-lived U.S. recession. That was "cured" (the Fed lowered interest rates from 8% to 3% between 1990 and 1992), and U.S. stock markets began their climb to the stars. By July 1997, the Dow had reached 8000 points - having doubled over the previous three years.
Through this ENTIRE period, 1982-97, Gold had established a solid FLOOR at $US 300 (and a ceiling at $US 500). Then came the biggest financial crisis since the 1987 stock market crash, the onset of the Asian financial crisis.
In the U.S., there were many reactions to this crisis, but two stand out in the context of this analysis. First, it became declared U.S. government policy that the great financial push over coming years would be to pay down and ultimately ELIMINATE U.S. government debt. Given the fact, already stated above, that the ultimate backing for all forms of circulating U.S. Dollars is Treasury debt, this "policy" is absurd on its face - UNLESS ACCOMPANIED BY A FUNDAMENTAL SWITCH IN POLICY AWAY FROM DEBT BACKING TOWARDS SPECIE (GOLD) BACKING FOR THE CURRENCY. Such a policy switch was never articulated, and probably never even contemplated. The stated "policy" worked though, to the extent that the worse the crisis got, the more of the world's money flowed into the "safe haven" which the U.S. and its Dollar was perceived to be.
The second reaction to the Asian Financial Crisis was a concentration of all the means already established to control the U.S. Dollar Gold price - WITH THE AIM OF PUSHING GOLD BELOW ITS 17 YEAR FLOOR OF $US 300. Thus, as 1997 wore on and the crisis worsened, the $US price of Gold fell. Gold fell below $US 300 (for the first time since March 1985) on November 26, 1997. With several short-lived exceptions, it has been there ever since.
Why do this? Simple. The U.S. had embarked on a "policy" of eliminating government debt. It had NOT, however, proposed to "back" the Dollar with anything else. Therefore, the only other "credible" alternative, Gold, had to be debunked once and for all.
Now, back to the beginning of this analysis. When Gold was pushed below $US 300, the U.S. set up a "Maginot Line". Financially, they put all their eggs in one basket. The Maginot Line of $US 300 had to be held at ALL costs.
When the spot future Gold price rose $US 5.40 to close at $US 302.20 on March 27, it marked the seventh time since November 1997 that Gold has struggled back above "the line". Five of those instances (Feb 1998, March/May 1998, Oct 1998, Oct 1999, Feb 2000) came before Gold had established a bottom. The bottom was established in April 2001. Since then, there have been two instances - in February 2002 and now in late March 2002.
Finally, let's look at the future of the U.S. government's plan to "eliminate" their debt. The present "debt ceiling" of the U.S. government - set in August 1997, shortly before Gold was forced below $US 300 - is $US 5.95 TRILLION. The Treasury has now reached that ceiling. In 4.5 years, Treasury debt has increased by $US 450 Billion - EVEN THOUGH THE U.S. GOVERNMENT ANNOUNCED "SURPLUSES" IN 1996, 97, 98, 99, 00, AND 01. Now, the government is back in admitted deficit and the proposal is to raise the "debt ceiling" by another $US 750 Billion.
It should be obvious to anyone that the U.S. government does not have, and never had, any REAL plans to eliminate Treasury debt or even to reduce it. It should be equally obvious to anyone that there is NO credible alternative being contemplated as an "backing" for the U.S. Dollar. The gradual increase in the Gold price (and the not so gradual increase in Gold stocks) over the past year is an illustration of the fact that this is indeed being discerned by more and more individuals.
And now, here we are at the threshhold again. Gold is again threatening to breach the financial Maginot Line of $US 300. When (not if) it does, the consequences for the global financial PTB (Powers That Be) will be the same as the consequences were for France when the REAL Maginot Line was flanked in May 1940.
That is why The Privateer has always said that a BULL market in Gold will NOT be established until Gold has consolidated ABOVE $US 300. Once that DOES happen, what was a ceiling will quickly become a FLOOR again. The repression of a price, ANY price, has consequences when the repression can no longer be maintained. And the longer and more contrary to free market action the repression, the greater the consequences when it finally breaks down. If you doubt that, consider what happened to Gold when $US 35 could no longer be maintained back in 1971.