Come clean now, how many of you reading this page anticipated Gold trading on Friday, August 9 with a certain amount of unease? On August 7, Gold had spiked $US 8.80. On August 8, Gold gave nearly half of that back, falling $US 3.90. Early indications on "Access" trading and in Asia were not looking good with Gold down another $US 2.00 or so.
Spare a thought for us Aussies. We normally go to bed when Gold trading is starting in New York and get up a little while after it is finished. When your esteemed editor rose this (Saturday in OZ) morning and jumped onto the net, he was most pleasantly surprised to see that spot future Gold had regained all but $US 0.10 of its August 8 losses. This is a BIG deal. Three weeks ago, on July 19, Gold spiked $US 6.80 to come within touching distance of its 2002 highs set in early June. A week later, Gold had been savaged, falling $US 20.60 to come within a whisker of $US 300. Not this time, not so far anyway. Gold has "spiked" again, and so far, it is holding.
Consider this. "Hulbert", the financial newsletter rater in the U.S., runs a "Gold sentiment index". On August 9, that sentiment index measured MINUS 15.4%, down from a PLUS 37.5% rating reached in late May. This bearish sentiment has been worsening for weeks and the $US 8.80 Gold surge on August 7 did nothing to disperse it. Happy is the Gold investor who sees such a pall of gloom overtake the future expectations for Gold. The wall of worry is perfectly intact. And it is infectious. We must admit we did not expect to see Gold regain all its August 8 losses on August 9, but it did.
Gold is "holding" and so are the paper markets. The Dow didn't manage to replicate the 400 point plus daily upmoves it was revelling in in late July, but there were three "three figure" gains in a row this week. The U.S. Dollar index was up on the week too. All this and higher Gold prices too. Truly, it is an amazing world we live in.
This week, there have been two main factors in the continuing enthusiasm for stock markets. First, there was a growing anticipation that the Fed might actually LOWER rates when they meet on August 13. That enthusiasm was being tempered slightly as the BIG day drew closer, but several highly placed Wall Street advisors are still predicting a 0.50% cut on Tuesday. The second factor was, of course, the IMF bailout of Brazil - all $US 30 Billion of it - announced on August 7 - after U.S. markets closed for the day.
The next day, the Dow added 256 points, led by the big banks (we wonder why?). Any stock with any connection to Brazil trading in New York zoomed upward. The U.S. Dollar index gained 0.76 points to 108.89 - its highest level since June 20. The "Apocalypse" averted was the potential for Brazil to default on $US 250 Billion worth of foreign debt. Don't forget, 2002 was ushered in with Argentina defaulting on $US 130 Billion in foreign debt. Two such collapses in the same year is not liable to be conducive to the financial health of the world. Oh yes, and Gold gave up almost half of its previous day's gains on August 8
August 9 wasn't so good. Bloomberg reported that "international banks" (read Citigroup, Bank of America, JPM, et al) were refusing to renew their loans and short term credit lines to Brazilian borrowers. A spokesman for one of these banks said that that they might reconsider their position after the elections are over. He was referring to the Brazilian elections, which take place in October.
So, less than 48 hours after the great "bailout" was announced, it was already in trouble. The Dow did manage to close in the black, after having been down sharply earlier in the day. The Dollar gave up about half of its previous day's gains. And Gold got all its previous day's losses back.
Apocalyse when? Not between now and August 13, when Mr Bush convenes his economic "forum" (see the late July issue of The Privateer - #455 - for an analysis of this forum). And of course, the FOMC meets on the same day to consider U.S. interest rates. And of course the day after that, August 14, all the U.S. CEOs and CFOs have to sign on the dotted line.
At the beginning of this year, the IMF refused to bail out Argentina. Now, after weeks of rhetoric about not bailing out Brazil - led by Treasury Secretary O'Neill - the IMF (read U.S.) has spun on the proverbial dime and come to the party. Why? Simple, they could not afford not to. Argentina defaulted, but their major exposure was to European banks. Brazil's major exposure is to U.S. banks. And those same U.S. banks, despite the bailout, are refusing to roll over loans coming due from Brazilian companies and government entities.
The financial system is stretched, if not to the breaking point, then at least to the point where the creaking is getting very loud indeed. Gold's snap back this week is one indicator of that. Another is the snap decision to bail out Brazil. And another is the decision by U.S. banks that they couldn't take the risk of prolonging their Brazilian exposure despite the bailout.
Normally, this time of year is the quietest of the year in U.S. markets. It is also often the time of year when the markets enjoy their "summer rally". Well, U.S. markets have certainly enjoyed one since the end of July. We don't think they will be enjoying it for very much longer. The main events waiting in the wings are the FOMC meeting and Mr Bush's "forum" on August 13, the deadline for the "Corporate Responsibility" act on August 14, and after that, the final outcome of the U.S. push towards a war with Iraq.
ALL of this might well be resolved by the end of August. What then? September/October are almost ALWAYS bad times of year for U.S. markets. They may be VERY BAD this year. Apocalypse when? Stay tuned. For the Dow, it is any close below the 2002 low of 7701. For Gold, it is any spot future close ABOVE $US 330.