President Bush signed the $US 781 Billion increase in the US Treasury's debt ceiling into law last weekend. The US Treasury's debt to the penny was "unfrozen" on Monday, March 20. As you can see (click on the link, already), by March 23, it had soared by $US 93 Billion. With US fiscal 2006 (which ends on September 30, 2006) not yet half over, the increase for the Treasury's "debt to the penny" for the year is already $US 430.8 Billion.
Is it any wonder that Gold "suddenly" soared $US 9.70 on March 24?
The "wonder" is not in Gold, it is in the US paper markets. On the stock market, the Dow remains frozen solid. It was up a grand total of 0.32 points this week and is still less than 450 points below the all time high it set more than SIX YEARS AGO. The yield curve on Treasury debt has resumed its inversion this week. Even more remarkable, every yield (excluding the six month yield) from three-month to thirty-year remains BELOW the 4.75 which the FOMC is expected to raise the Fed Funds Rate to when they meet next Tuesday - March 28. US bond yields are obviously at ROCK BOTTOM. Yet neither the US stock nor bond markets has shown any sign of weakness - YET.
The US economy is a different matter. Last week, the US government announced that the budget deficit for the short month of February was a gargantuan $US 119.2 Billion. They also announced a January trade deficit of a record $US 68.5 Billion. Then there was the US current account deficit for 2005 which came in at $US 804.9 Billion. Finally, it was announced that as of the end of 2005, foreigners held a total of $US 11.154 TRILLION in US financial paper assets. That is almost identical with annual US GDP.
This week, the "market" which has sustained US consumers for most of the past five years, the US housing market, sustained what may prove to be a mortal blow. It was announced on March 24 that new home sales in the US in February had plunged by 10.5%, the biggest monthly drop in almost nine years. It was also announced that the US now has the biggest inventory of unsold homes in more than ten years - since January 1996.
Australia's housing market, which preceded the US market into a slump, is releasing even worse news. On March 21, it was announced that new home starts for the last three months of 2005 were down no less than 20% from their peak during the first quarter of 2004. New housing starts in Australia have fallen in six of seven quarters up to the end of 2005.
And lest it be still thought that the US housing slowdown is an "aberration", the two main facilitators of the housing boom, Fannie Mae and Freddie Mac, are in dire straits. Fannie Mae have postponed the release of their 2005 results "indefinitely" and are hinting darkly at up to $US 10 Billion of "additional losses". And the CEO of Freddie Mac has just resigned.
In the late 1990s, the US credit expansion found its fuel in a voracious consumer spending boom underpinned by the stock market bubble. In the first half of the 21st century, this expansion was accelerated by consumer spending fuelled by the housing bubble AND by the voracious borrowing machine which is the Bush Administration. Now, the consumer has run out of "bubbles" with the clear slump in US housing while the Bush Administration is facing the CERTAINTY of a Treasury debt slump as yields have nowhere to go but up. The pressure on the US financial system is gigantic, and is clearly ramping up by the week.
It is difficult to get any hard news on the straw that was supposed to break the US Dollar's back, the Iranian Oil Bourse. Clearly, it did not get started on "schedule" on March 20. The latest rumours (and we stress they are nothing more than rumours) are that the bourse will start up in "May or June" and will initially at least trade oil for both US Dollars and Euros in "parallel".
While depriving the US Dollar of its global role in the pricing of commodities like oil would sink the Dollar immediately, the debt trap which now engulfs all sectors of the US economy will do the job just as well if more slowly. In present circumstances, the only surprising thing about Gold is that it is still below the $US 570 plus bull market highs it set back in early February.
However, Gold reacted instantly to the release of the terrible US housing news on March 24 - the actual fall in new housing starts was five times what Wall Street had been "expecting". Expect an increasing flow of such fiscal and financial shocks in the weeks and months ahead - no matter how hard the statisticians try to "smooth" the numbers out.
Watch the Gold "markets" by all means. But never forget that the reason for the present global financial accident waiting to happen is the simple fact that Gold and "money" have been divorced for almost 35 years. There is no way that the US Treasury could have piled up even 10% of its present level of funded debt if the US Dollar had not been made IRREDEEMABLE IN GOLD on that fateful mid-August day in 1971.
Ultimately, the global financial system will have to be redeemed, and Gold is there, patiently waiting in the wings to resume its rightful role as MONEY. In the meantime, remember that Gold can neither be borrowed into existence nor "printed". Its comparative scarcity and nearly three millenium history of being the world's money make it THE PLACE to preserve purchasing power for what lies ahead.