Two figures stood out during our weekly review of reams of economic data and, quite frankly, both give us pause for serious concern regarding the general economic future.  The first, “Foreign Holdings of U.S. Government Debt”, is continuing on its recent downward path.  The second, the level of “US National Debt” is approaching a staggering – and ominous – ‘round’ number.

We have been documenting the incredible reversal in the figures for “Foreign Holdings...” for some time, but the basic concept is easy to review.  For the past several years, foreigners have been financing the maintenance of America’s standard of living by injecting monies into the American economy and one of the means has been the purchase of US government debt instruments.  The growth in the amount of these debts in foreign hands has been on the order of about $400 billion per year, but about twelve weeks ago, we began to notice an abrupt change in direction and, since that time, not only has there been slower accumulation, there has been an actual sharp decline in that figure.  During the past week, another $20 billion was unloaded and the year-over-year change has descended to $136 billion.

The implications of that figure, at least in our opinion, mean that America may have to make their government debt more attractive to foreigners, and the most obvious means would be to start increasing the interest paid on such holdings, but increasing interest rates would fly in the face of all recent actions by both the Treasury and the Fed.   At the moment, we believe there is no easy way out of this conundrum and, historically, uncertainty has been a hallmark of past sustained golden and silver bull markets.

Our other piece of data is the “Treasury Gross Public Debt” (TGPD) and last Friday’s figure amounts to $14.868 trillion, just $132 billion short of the $15 trillion mark.  At the present rate of accumulation, that mark should be exceeded by the end of November.  It is not only the sheer amount of such numbers that is of great concern, but also the rate at which debt is being accumulated.  It is worth noting that America did not exceed the $2 trillion mark in the TGPD until early in 1986, meaning it took one hundred and ninety-seven years of American history to reach that number.

Here we are in late 2011 approaching the $15 trillion mark, meaning in the past 25 years, America has accumulated an additional 6.5 times the debt it took 197 years to reach.  We cannot help but wonder why this set of numbers doesn’t scare the world’s financial authorities right out of their boots, but it seems to be having little impact in the day-to-day workings of international commerce.  Our guess is that such fears will mount, and it will happen soon.

We also believe there is a correlation between the two sets of data as several nations begin to accept the possibility that the once-almighty US Dollar could be in for an abrupt fall from grace as new fiat dollar creation reaches figures that were thought to be unimaginable just a few years ago.

In our opinion, this possibility is yet another factor working to the long term advantage of the monetary precious metals.

One of the tools we use in our gold price analysis is the comparison between movements in the price of gold compared to action in the mining share indexes.  As a rule, when the indexes outperform the metal itself, that can be considered bullish for the metal as it implies investors have confidence in gold’s future price movement and so are moving to acquire the shares.  The opposite is also true, that is when action in the shares underperforms gold itself, such action implies that future movements in the price of gold itself could be of a negative nature.

Unfortunately, we must report that the shares have been under-performing the metal itself for some time.  Please note on the XAU chart that today’s Index number is virtually identical to that recorded in late 2009, in both instances the Index recording values near the 200-point mark.  However, in late 2009, the price of gold was trading in a range centered close to $1,100 while at present; the general range is centered near $1,700 – a gain of more than 50%.

We will be watching the relative movement between gold and the gold mining shares, looking for a change in relative price movements.

It still amazes us how swiftly market sentiment can reverse itself.  All last week, financial markets were celebrating the ‘resolution’ of the European debt crisis as reports were forthcoming that Germany, France and other powerful European nations had worked out a plan to rescue banks from their Greek bond holdings which were descending toward worthlessness.

Now, quite suddenly, it appears there is no credible ‘fix’ in the works at all.  At the recent G-20 conference in Paris, Bloomberg News Service reports that, “...European leaders have one week to settle differences and flesh out a strategy to terminate their sovereign debt crisis as global finance chiefs warn failure to do so would endanger the world economy.”

Pardon us for stating so, but wasn’t that exactly what European leaders stated they had accomplished when they issued all their favourable releases last week?  Now, it appears that no concrete plans have been created and financial markets are plunging this morning as a result.  The G-20 leaders, headed by Timothy Geithner, US Secretary of the Treasury, set a deadline for the next European leaders’ conference in Brussels on October 23 as the new deadline for decisive action.  If the European leaders fail to act by that date, then the G-20 leaders will then decide what actions they might take at their major meeting slated for November 3-4 in Cannes, France.

Is this is what is meant by the phrase, “kicking the can down the road?”

To date, most talk centers around using the IMF to contribute heavily to any European ‘solution’ with the heavy lending to the IMF being provided by the US Treasury. 

We would offer the opinion that all of this information is inter-connected and, when put together, is creating an impression that US Dollar creation could surge completely out of control, thereby diminishing the value of Greenback holdings, which might explain why someone appears to be so desperate to unload such holdings over the past 12 weeks.

We should be hearing much more regarding this situation over the next several days and will do our best to keep readers informed.

As of 9:00 AM PDT, financial markets in North America continue to trade to the downside with the Dow Industrials off by about 165 points while Canada’s TSX Index is down by nearly 150.  Gold and silver have both turned weaker with gold down by about $5.00 to around $1,677 and silver trading near $31.80.  Base metals have also turned sharply lower and mining share indexes are off by about two percent.

In other markets, crude oil is close to unchanged; long term interest rates are down slightly; while the US Dollar is moderately strong in currency markets with the DX Index having returned to the 77 level.

All quotes US$ unless otherwise noted.

Next “Melman Minute” scheduled for Wednesday, October 19, 2011