"The current Gold correction has found support, if not yet a proven bottom. Last week, that was not the case. This week, if you were looking for an opportunity to add to your Gold holdings, you have found one. Nuff said?
(Gold This Week - May 21)
On May 28, the European Union (EU) reported their price inflation rate for May. The rate was 2.5%, the highest since late last year. The European Central Bank (ECB) presently maintains official rates at 2.0% - a NEGATIVE rate given this price inflation report. The ECB meets to decide on European interest rates next Thursday - June 3.
In the US, April price inflation has been reported at 2.3% - up from the official 1.7% level recorded in March. The Fed presently maintains official rates (the Fed Funds rate) at 1.00% - a VERY NEGATIVE rate given this price inflation report. The Fed does not meet again officially (via their FOMC meeting) for a month - until June 29/30. This is the FOMC meeting at which most expect the Fed to RAISE rates - for the first time since May 16. 2000.
Of course, the consensus amongst those who expect the Fed to raise rates (the expectation is by no means unanimous), is that they will raise by the smallest amount possible - very likely 0.25%. This will still leave the US with NEGATIVE official rates of massive proportions. In REAL terms, a Fed Funds rate of 1.25% would be derisory with most private estimates of the rate of price increases in the US running from 8% up to as high as 15%.
The Europeans, on an official basis, have rates much closer to their official level of price inflation, even though like the US, these official rates are at four decade plus lows. It would be the hight of "unfriendliness" if the ECB decided to raise European rates before the Fed has the chance to raise US rates, but Europe has been getting more unfriendly lately. As a HUGE item in evidence, there is the suggestion that oil be priced in a "basket of currencies" rather than exclusively in the US Dollar recently made by the EU's energy commissioner, Mr Loyola de Palacio.
On top of that, there are growing "noises" out of Japan from the huge investment funds there to the effect that they are cutting back on their investment on "foreign" (read US Treasury) bonds. To quote an "official" from one of these funds" "...we cannot buy high risk assets.". We do not think that Mr Stone at the US Treasury would be to happy to hear his beloved debt paper referred to as "high risk assets."
But when looking at the totality of the financial situation inside the US, the only thing which is astonishing is how long it has taken the rest of the world to begin to wake up to the fact that $US denominated debt paper IS "high risk assets".
Consider the fact, mentioned above, that the last time that the Fed actually raised official US interest rates (from 6.00% to 6.50%) was in May 2000 - four years ago. Remember that time frame when you consider this. The US M-2 money measure in 1980 - after a decade which is universally known as the decade of inflation - totalled $US 1.5 TRILLION. This amount had been built up over the 200 years of the existence of the United States.
In a little over four years - from early 2000 to May 2004 - the US M2 money measure has increased by -- wait for it -- $US 1.5 TRILLION. It took the US 200 years (roughly 1780-1980) - replete with settlement and political integration and wars and recessions and investment booms and everything else which goes into a timespan of TWO CENTURIES - to build up a "money supply" of $US 1.5 TRILLION.
Mr Greenspan and his cohorts at the Fed have equalled that record since his most recent appointment as Fed Chairman - WHILE LOWERING US INTEREST RATES TO ECONOMICALLY INSANE LEVELS AT THE SAME TIME. Of all the fiscal, financial, and economic insanities which have littered Mr Greenspan's most recent term as Fed governor, this is probably the one that stands out.
US stock markets topped out in January/March 2000. Mr Greenspan stopped raising US rates in May 2000. He started lowering them in January 2001. The Dollar topped started to fall in January 2002. The US Treasury bond market topped out in June 2003. As each of these "bubbles" finally started sucking air as the monetary fuel needed to sustain them proved insufficient, Mr Greenspan turned the money spigots up another notch. The true "miracle" of the past four years has been that anyone, anywhere, seriously through it was indefinitely sustainable.
In one month, the FOMC meets. If they DON'T raise US rates, the temptation for the rest of the world (after taking a few deep breaths and rubbing their eyes in sheer wonderment) will be to sell or even DUMP their US Dollars and Dollar-denominated assets. If, as is far more likely, the Fed DOES raise rates, the raise is absolutely certain to be far too small. To raise rates to anything like a sane level, given the rampant monetary creation and now resulting price rises, would be to court disaster as the collateral foundation under the banking system would be instantly threatened with implosion through debt defaults.
But whatever the initial US rate rise, and whenever it takes place, the biggest problem for the US monetary "authorities" will be the SHEAR in the future outlook held by investors and "savers" alike. For more than four years, the world has watched a US blowout in monetary creation and borrowing accompanied by ever LOWER US interest rates. Now, they are about to witness the long-forgotten phenomenon of HIGHER interest rates accompanied by a potential slowdown in borrowing. The turnaround has already started. In April, US average incomes rose by 0.6% but consumer spending increased only 0.2%.
The US government has already ramped their deficit spending up to $US 500 Billion a year plus while US trade deficits are also running at an annual rate of well over $US 500 Billion. But it is a well known fact that US CONSUMER SPENDING accounts for about 70% of US economic activity, and therefore is the most important item in the measurement of US economic "growth".
Take this away, or even lower it a little (see the April figure above), and the US government will find it VERY difficult to cover for the "gap" through increased deficit spending - ESPECIALLY in an environment in which US official interest rates are RISING.
If there has been a time when the pressure UNDER the Gold price was as high as it is now, we are unable to identify it. Gold is now up $US 20 from its May 13 low, but is not yet half way back to its multi-year high of $US 427.80 (spot future closing basis) set on April 1 - two months ago. Meanwhile, with the US Dollar is itself again under pressure, the world has a whole MONTH to wait until the decision of the Fed is known.
That, in current circumsances, is a LONG time to wait. Even if the Fed does raise rates at the end of June, it will not raise them anywhere near enough. The last time that the US government was running deficits anywhere close to as big as they are now was in 1990-91. Back then, the Fed Funds rate fluctuated between 6.50% and 8.25%.
There is no doubt whatsoever that rate levels even half as high as that would DECIMATE the US economy from one end to the other for the very simple reason that they are not "affordable", the existing debt levels are so high that the increase in "servicing costs" would prove fatal to a large proportion of US consumers and businesses. That is the situation the US faces, and there is no way over, under, around, or through it.
In such circumstances, Gold as financial insurance is absolutely MANDATORY. Any "capital gains" is simply a bonus. But there is no-one who is in the slightest way concerned with the economic future who can afford NOT to own Gold. The situation is NOT sustainable. It is merely a question of whether the wheels fall off BEFORE the Fed next meets, or afterward.