Last week, we reported on the recently released minutes of the FOMC meeting of October 28, in which the Fed opined that inflation could remain low until 2005 and that they would therefore have the leeway to keep the Fed Funds rate at its present 1.00% level throughout the coming year.
That might have had something to do with Gold reaching new 2003 highs this week, despite the Saddam capture, and with the $US index plumbing new 2003 lows. It also might have had something to do with two very interesting developments, one in China, the other in Japan.
On December 17, China's Central Bank announced a sharp increase in the interest rates which banks are allowed to charge for commercial loans. The new levels are 9.02% for commercial loans and 10.62% for agricultural loans. This is not far off a DOUBLING of the previously permitted rates. Stop here and contemplate for a second the CARNAGE which would instantly envelop the US economy if US banks suddenly began to impose that level of rates on their commercial and agricultural loans.
This opens the way for Chinese banks to lend to what are perceived to be more "risky" ventures instead of denying them any loans at all, as they have done in the past. Previously, with rates much lower, the Chinese banks directed almost all of their loans at the least "risky" borrowers, mostly state-owned enterprises which carried implicit government guarantees of repayment.
For years, the Communist Chinese government has been trying to "wean" the Chinese economy off reliance on government "enterprises" and build the private sector. Now, China is accelerating this process, while at the same time promoting itself across Asia (and Europe) as a potential alternative market to the US for exports.
The other interesting development took place in Japan, also on December 17. The Japanese government announced that they would seek authority to sell "at least" 40 TRILLION Yen ($US 371 Billion at current exchange rates) over the coming 15 months. Over the past year, Japan has sold just under 18 TRILLION Yen (and bought US Dollars and Treasury paper with almost all of it) in an attempt to minimise the Yen's appreciation against the Dollar. They clearly expect to keep up that effort, and just as clearly expect that much more ammunition will be required next year.
China's currency (the Yuan/Renmimbi) has been pegged to the Dollar for years, to the increasing discomfiture of US financial and government officials alike. The Chinese government has recently stated that they do not intend to "float" the currency for a considerable period. Japan's Yen is not pegged to the Dollar and Japan has just given itself permission to print what for all intents and purposes is unlimited quantities of the stuff in order to keep the exchange value of the Yen down against the Dollar.
Here are two examples amongst many more which could be mentioned of the increasing strains being put on the global financial system by the chronic and worsening budget and trade imbalances being run by the US. In this context, Japan and China loom large as the two largest external $US holders in the world. Japan is doing its utmost to inflate the Yen to the point where they can be certain that it and the Dollar will sink into oblivion at approximately equal speeds. China (like the USSR before it) is attempting to "free up" an economy while clinging tenaciously to totalitarianism in the political sphere. This cannot be done, as the recent history of the USSR and Eastern Europe has so eloquently demonstrated.
Sadly, not many in the "West" pay much attention to such matters. In the US, the media has been fixated on the capture of Saddam. So were the markets, for a few hours. If you frequent the Kitco Kitco 24 hour spot Gold chart, you were probably not surprised to see the cliff which developed on it on Monday, December 15 when Asian markets opened for the week. In Asia, the first markets to react to the news of Saddam's capture, the spot Gold price almost instantly dived from $US 409 to just above $US 400. It then proceeded to get it all back in later Asian/European/and US trading. Even more disconcerting to the US financial powers that be, US stock markets did not "boom" and the US Dollar did not recover.
Ever since the Dow bottomed for the year just before the Iraq war began, US investors have been fixated on the US stock markets and US real estate. Since US mortgage rates began to spike in late June/early July, the stock market fixation has become even more all encompassing. Gold is not (yet) on their radar screens, nor is the steadily falling Dollar. The stock markets ARE the investment markets as far as they are concerned, not surprising given the fact that those same markets were in a bull for the quarter of a century between 1975 and 2000.
In the last two years of its great bull market, 1998 and 1999, the Dow gained 16.10% and 25.22% respectively. Then came three straight losing years, 2000 - 2002. But THIS year, as far as Wall Street and most of Main Street is concerned, the "bull" is back. One can see why this should be the attitude given the fact that as of its close on December 19, the Dow is up 23.22% so far this year. This betters its annual gain for 1998 and is very close to its annual gain for the last year of the bull market - 1999.
The bull market of the late 1990s was accompanied throughout by a RISING Dollar. The admittedly large BEAR market rally of 2003 has been accompanied throughout by a FALLING Dollar.
In 2002, the Dow fell 16.76% and the $US index fell 12.75%. Gold gained 24.80% in $US terms in 2002. In 2003, the Dow is up 23.22% while the $US index is DOWN 13.43%. Gold is up another 17.52% in $US terms. Clearly, the Dow's performance in 2003 is the anomaly. Just as clearly, it was a NECESSARY anomaly. Another down year for the Dow in 2003 would have been the fourth straight, and that has only happened once before, in the Crash and Depression years of 1929-1932.
So, as 2003 draws to a close, we have the two biggest US Dollar holders in the world, Japan and China bending their financial and monetary systems all out of shape, both gearing up for a new year which they both clearly foresee as being a "difficult" one. The Bush Administration and the Fed, meanwhile, pretend that there are no clouds on the horizon and that everything is "business as usual".
2004 is, of course, an ELECTION year in the USA.
This week, Gold set another 2003 high with a spot future close of $US 412 on December 17. That's only $US 2.00 below the spot future close of $US 414.00 set on February 6, 1996 which marked the top of Gold's last bull market. The Dow also set another 2003 high, closing on December 19 at 10278. Gold hit $US 400 on December 1. The Dow regained the 10000 level on December 11. Right now, the Dow's year to date gain is 23.22% while Gold's is 17.52%. On an annual low to annual high basis, the Dow is up 36.60% while Gold is up 28.15%. It will be interesting to see if the Dow maintains this lead till the end of the year.
The problem is that since the US stock market is now looked upon as a savings vehicle and as a repository for retirement funds, the Dow is going to have to keep up this advance almost THROUGHOUT 2004. The election isn't until November. The gross imbalances in the financial system point straight against this being possible. So do the increasingly desperate measures being taken by the rest of the world NOW - almost a year before the election - to cope with these imbalances.
There are seven trading days left in 2003 on US investment markets. What happens over those seven days is of interest, but of minor concern in the larger scheme of things. The exception to this will be if Gold can decisively break above the $US 414 (spot close) 1996 bull market high before the end of the year. What is of MAJOR interest is what happens when the markets crash into action for 2004.
There will be one more shortened Gold commentary in 2003 - next Friday - December 26. We wish all our readers a Very Merry Christmas. We'll leave the "Happy New Year" till next week.