The "G-10" has already come and gone. That was the meeting of the world's top ten Finance Ministers and Central Bankers in Basel, Switzerland over the weekend of January 10-11. At the meeting, the Central Bankers put on their usual dignified miens and dead straight faces and agreed that "global currency tensions are a risk". They also said that "excessive currency movements are unwelcome". The interpretation of this and other comments which came out of the meeting was that the Central Bankers might be nearing agreement to try to halt the US Dollar's slide. Of course, none of the participants at the meeting ever mentioned the US Dollar specifically in any of their pontifications about currency tensions or excessive currency movements.
Over not quite one month, between January 10 and February 7, four potentially HUGE political/financial events are sheduled. The first, the G-10 meeting, has already taken place. The second is Mr Bush's State of the Union Address on January 20. The third is the Fed's first FOMC meeting of the year on January 27-28. And the fourth is the G-7 meeting which will take place in Florida on February 7.
All this international activity (and if you think Mr Bush's first campaign speech of 2004 and the Fed's first meeting of the year are not "international activities in an economic/financial context, you haven't been paying attention) is grouped early in the year. It will receive worldwide attention, including attention inside the US. The US is not yet totally geared up for its election year. This is the world's finance ministers' and central bankers' big chance to persuade the world that they have everything under control.
Remember the last G7 meeting? It took place over the weekend of September 20-21, 2003 in Dubai. The "highlight" of the communique which was the result of that meeting was the contention that the nations involved favoured "flexible exchange rates" set by the markets. The G-7 participants were so keen on having this piece of high level fiction accepted that the Japanese Central Bank even stopped intervening in the currency markets for a couple of weeks leading up to the meeting. Well, "flexible exchange rates" didn't survive that G-7 meeting for more than hours. The Japanese resumed their intervention (selling Yen for Dollars) in late September and have been ramping it up unceasingly ever since
In the aftermath of that G-7 meeting last September, the $US index broke down to new 2003 lows. In the week before and after the G-7 met last September, Gold was challenging and narrowly rising above the 2003 highs it had set back in February 2003. Two weeks after the meeting, on October 3, 2003, Gold suffered a sudden $US 13.70 swan dive. Sound familiar? It should. Gold suffered a $US 13.30 swan dive on January 15.
After that swan dive in October 2003, it took Gold three weeks to regain its highs. After that, Gold went on to break through the $US 400 level in early December. By that time, the $US index was racking up new lows on an almost daily basis, a process which continued with hardly a break, until the G10 met on January 10-11.
Four months ago, the G7 met at the end of a period during which the $US index had been fairly flat. Now, we have just seen the first of four potentially HUGE political/economic/financial events in the lead up to which the $US index has been plummeting at ever increasing speeds. This time, the danger was far more acute than it was in September 2003. So this time, the $US has rebounded and Gold has been slammed right away. The mechanism which brought this about is not important here. For the $US, the obvious impetus is short covering. For $US Gold, the obvious impetus is long liquidation as a reaction to a rebounding Dollar. Don't forget, Gold has only broken above its previous (1996) bull market high earlier this month.
The problem, for the Bush Administration and the US political establishment is to sustain the Dollar (and US stock markets) and keep a tight hold on Gold for the next ten plus months, until the elections in early November. The more ignorant amongst financial commentators have dismissed the Dollar's weakness with the "explanation" that it doesn't seem to concern the White House. Ever tried to avoid "breaking wind" in polite company? If you did a very good job of it, no one noticed any physical discomfort at all. That does not mean that it wasn't there.
The last "king hit" on Gold in early October last year was to prevent it from decisively breaking through its highs of February 2003. That one lasted for three weeks. Then gold did break through those highs and went on to break through the $US 400 level by the end of the year.
This time, Gold had broken through its previous (1996) bull market highs at the beginning of January. This, as we pointed out in last week's Gold Bull Market commentary is a very big deal, breaking a sequence of ever lower bull market tops that stretches back to Gold's $US all time high in January 1980. Gold has been knocked down again, but the damage has already been done.
As stated, it took $US Gold three weeks to bounce back from the hit of October 3, 2003. It remains to be seen how long the bounce back will take this time. We don't even know yet if Gold has finished "correcting", or if $US 400 will hold. We DO know that the global financial situation is worse than it was last September/October. So does everyone who matters in international finance, right up to (or down to, if you prefer) the IMF, who put out a dire warning about the consequences of a potential Dollar melt down earlier this month.
Here's a final point to ponder. Back in August 2003, in issue #483 (published on August 31, 2003), The Privateer discussed what had come to be called the "McTeer put". Robert McTeer, the President of the Dallas Fed, had just been asked this question on CNBC: "What should the typical investor look at to see that the Fed is supplying enough liquidity to meet the needs of the system without deflating or inflating?"
Mr McTeer responded as follows: " ...a simple way to measure how the Fed is doing is to look at the price of Gold. If it is over $US 400 we are too easy and under $US 300 we are too tight."
By Mr McTeer's own "measurement", the Fed has been "too easy" since early December 2003. With the hit on Gold, they are not as "easy" as they were a week ago. The FOMC meeting is in just over a week, on January 27/28. Will this be the second FOMC meeting (the first one was on December 9, 2003) at which Gold is above $US 400 and the Fed is "too easy" according to Mr McTeers measure?
If the Fed is, by Mr McTeer's criteria, too easy - will they raise rates? Don't hold your breath. The next month should be very interesting.