The Gold chart above is certainly pretty, isn't it? But looked at simply as a chart, and not as a Gold chart, there is some excuse for getting worried about getting close to previous highs, especially in the present investment climate. You will recall that back in the last half of the 1990s, US stock market investors got used to "buying the dips" and never had a moment's concern about the Dow (or the S&P or the Nasdaq) "getting close to previous highs". But this is now, and this is Gold.
If you study the climbing ratio of the $US Gold price divided by the $US index, your concern, if you have any, should lessen substantially. Note especially the first chart which compares Gold and the $US index using a common starting point at the beginning of 2002. You can clearly see that while Gold remains below the high it set back in February, the $US index is now FAR below where it was in February. It is a more than reasonable proposition to say that had the US not embarked on the Iraq war in March, conjuring up memories of Gulf War I in 1991 and Gold's swan dive at the start of that war, Gold would now be substantially ABOVE its February 2003 highs.
Instead, of course, Gold went into a sharp correction as soon as it became CERTAIN that the US would go to war in Iraq. That certainty came when Secretary of State Powell stood before the UN Security Council to make the US pitch for war in early February. In the two months between Mr Powell's speech in early February and April 7, 2003 - with the actual War in Iraq in the middle - Gold corrected all the way from $US 379 to $US 321.40.
In early 2003, mainstream US financial commentators were talking about a Gold bull market. By early April 2003, most of these same mainstream US financial commentators were talking about the END of Gold's bull market. Shortest "bull market" we've ever heard of. Reminds us about what the commentators were saying about the Dow shortly after it got off the floor in the second half of 1982.
Of course, $US Gold has been rising steadily, and the $US falling steadily, ever since that April 7 low. And this week, while the fall of the $US itself did not accelerate, the rise of Gold in $US terms DID accelerate. More important, Gold posted substantial rises against EVERY major currency this week.
On a bare bones simple level, the fact that the $US index is now far below its level when Gold reached $US 379 on February 4 indicates that Gold should now be far above its level of February 4. Of course, it isn't. And because it isn't, not too many "mainstream US financial commentators" are willing to say that Gold is in a bull market and even fewer are willing to look ahead towards what may happen if and when Gold exceeds its 2003 high and thereby embarks on the NEXT LEG of its bull market.
Why is this? Lots of valid answers to this question could be given, but we think that one answer stands out. That answer has to do with the "deflation" bogey man which has once again been raised by the Fed in recent weeks.
Last week, we talked about "Tracking The Deflationary Beast" and reminded you about Mr Bernanke's extraordinary speech given in November 2002. Do you remember what happened after Mr Bernanke gave this speech and was then backed up by Mr Greenspan? Two things happened. First, the $US broke below previous 2002 lows. Second, Gold, which had been in a $US 25 trading range for most of the previous nine months, broke loose. In two months (December 2002 - January 2003), Gold soared from $US 316 to $US 380.
About three weeks ago, the Fed started to revive that "deflation" bogeyman. First, the $US Dollar decline accelerated. Second, the Gold recovery from its Iraq war correction acclerated. The Fed, of course, defines "deflation" as falling prices. The situation is about as ironic as it is possible to get. Mr Greenspan is now talking about the Fed's ability (if necessary) to push the entire US yield curve towards ZERO - if necessary. The louder he talks about it, the faster the Dollar falls, and the harder it gets, in the long run, from keeping US interest rates from actually RISING.
Apparently, Mr Greenspan isn't worried that ANY amount of manipulation on his part will induce any large-scale US Dollar sell-off. Consider this quote from his recent testimony:
"No. I would think not, largely because the stock of dollar assets is so huge and the ability to move them around is fairly limited, that I think adjustments don’t occur off the cliff… The question is, what do the holders do with those assets? They’re so heavily involved in dollar-denominated claims that while obviously they can move out of them, and would, there are limits to how fast these things tend to move."
In Mr Greenspan's estimation, the rest of the world, and Americans too, are trapped. There are already so many US Dollars and US Dollar debt instruments that they can't be sold because there's nothing big enough to take their place.
And just to emphasise the point, there are going to be a LOT more Dollars out there soon. Consider this quite from last week:
As you may know by now, the Senate HAS raised the debt limit. It waited till the very last minute, after the House of Reps had risen for the week long Memorial Day recess bafore bringing the bill to the floor - and then passed it. The bill contains a $US 984 Billion increase in the Treasury's debt limit, which is expected to keep the US government going for a year or so.
DEFLATION? You have got to be joking! In the late 1800s, the US stock of money was stable and REAL productive capacity was expanding rapidly and interest rates were low. The result was a general fall in the price level combined with a huge increase in the standard of living of ALL Americans. Now, the US stock of money is expanding at a speed never before contemplated, let alone seen. REAL productive capacity is down to levels first reached more than 60 years ago. And interest rates are even lower.
If, as very well may happen, the US financial and economic system collapses, it will be as the direct result of a grotesque INFLATION of the quantity of US Dollars which has been going on for many decades. The spark to ignite such a calamity would be a global inability and/or unwillingness to accumulate any more of these Dollars, especially in a situation where the risk of holding this depreciating "asset" is not covered by a rate of return commensurate with it.
In short, it will be the BUST which inevitably follows the government and central bank induced and manipulated BOOM. One does not put out a fire by pouring petrol (gasoline) on it. All that happens is that EVERYTHING is consumed by the flames. The Fed has been doing this ever since the Treasury debt was "frozen" back in February. Now, with their new permission to borrow, the Treasury is about to rejoin the fray after an enforced three month sojourn on the sidelines.
In such a situation, the new upleg on Gold's bull market is imminent. Only two events might postpone it. On June 5, the European Central Bank has its bi-weekly meeting. Every second such meeting is accompanied by a press release, and this one will be. Speculation (wishful thinking?) is growing that at this meeting, the ECB will announce an 0.5% cut in European interest rates. If they do, the pressure on the Dollar will be eased, at least temporarily. If they DON'T, the pressure on the Dollar will massively increase.
The other event? According to a report sourced from Knight/Ridder: "The Bush Administration has begun debating whether to take action against Iran.". Iran is accused of harboring Al-Queda operatives linked to the recent bombings in Saudi Arabia. There are also "fears" expressed that Iran might be "closer than once thought" to developing nuclear weapons. The ubiquitous "senior officials" are unanimously denying that anyone was suggesting an invasion of Iran.
War as distraction mark II? The one certainty here is that if the US DOES invade Iran, it won't be doing so for any of the stated reasons. It will be doing so in another desperate effort to distract the world from its own internal economic/financial problems and to stage yet another demonstration of the possible consequences of doing anything (like selling Dollars) that might worsen that situation.
If the Europeans DO lower their rates on June 5, the pressure for a distraction will lessen. If they don't, it will increase. Either way, the measure will be temporary. Another US war hard on the heels of Iraq could easily backfire, and worsen the very things that the Bush Administration is trying to distract the world from.