A Melman Minute — August 2, 2011
| By | Leonard Melman |
|---|---|
| Date | August 2, 2011 |
It is amazing just how wrong the conventional media can get things. Once President Obama made his Friday speech announcing that a resolution to the debt default crisis was at hand something he would not have done unless it was a done deal pundits from radio to TV to print media all began forecasting a reversal to the downside for gold, since, as they so unctuously explained, it was only the apparent onrushing debt limitation crisis which had propelled gold to its recent record highs. Boy, were they in for a surprise.
Yes, gold did sell off slightly Monday for a few minutes, falling to about $1,610, before surging once again. Then, following yesterdays confirming vote by the House of Representative, a step about which there had at least been some question (the Senates approval where the Democrats have a majority is already taken for granted), gold really took off, rising back to $1,630 at the close of trading yesterday and then the overnight markets kicked in overseas and by early this morning, gold was once again in new record high territory, this time surpassing the $1,640 mark.
What the pundits failed to realize at least in our opinion is that the crisis resolution resolved nothing at all. The US Treasury, which was drowning in debt, was now going to drown in even more debt. Speechmakers may have SAID that the wild spending sprees of the past decades which brought America to its financial knees were going to abate, but there was an absolute absence of any specifics regarding which agencies were going to be obliterated, which programs were going to be shelved permanently, which recipients of government largesse were going to have to do without, which horrendously generous pension plans were going to be scuttled, etc.
And so, the investing public has taken one good look and apparently determined that this best efforts by the political establishment was nothing but an attempt to continue business as usual while appearing at the same time to have become ferocious practitioners of austerity.
Ironically, while this plan was being put into motion, a plan which many interpret will weaken the Greenback over time, the rest of the world poured investment funds into US Treasury Bills and longer-duration US Treasury Notes and Bonds, which set quotes on those instruments soaring (see chart of US 30-year Treasury Bonds) and long term interest rates plunging.
One of the most important end results of this entire episode will be the question of whether the President has seen his general standing improve or decline and we believe gold may indeed provide us with an important indication of the answer. It is our opinion that there will be a general correlation between Obamas changes for re-election in the sense that as those chances appear to improve, gold should rally. Conversely, if it begins to appear that he will be a one-termer and will be replaced by a much more conservative President, then we would expect a somewhat negative reaction from gold.
The Federal Reserve Board has quite a dilemma on its hands, namely the concepts of Keynesian economics, which it has followed almost religiously, appear to be failing yet they have no other philosophy at their disposal and they have already used up virtually every Keynesian arrow in their quiver to little or no effect. Interest rates are already down to virtually zero short term and historic low levels long term. They have thrown, quite literally, trillions of newly-created dollars into the economic mix. They have encouraged and supported the American Congress in its stimulative efforts of running huge deficits and spending trillions on make-work projects.
Yet the economy continues to flounder, not just in America, but in many other nations of the world.
We have already reported how auto sales are in decline, the real estate market is close to dormant, personal consumption is flat and wholesale sales are once again declining, all of that in addition to employment numbers that have been truly dismal for the past two months.
And now, just this past weekend, the Institute for Supply Managements Index reports, one of the most reliable economic indicators, provide further evidence that the economy continues to pull back from previous growth. Their overall Manufacturing Index fell from 55.3 in June to 50.9 in July, a particularly sharp drop which moved that Index down into neutral territory. Other sub-indexes for production, supplier deliveries, employment and new-orders all declined for the month.
Even worse, the malaise is spreading as indexes for Brazil, China, the U.K., Russia and Spain all showed relative declines for July with some reaching new two-year lows.
A further indication of renewed troubles is the sudden parade of job loss announcements. Among the latest are a proposed 3,000 job cut by Barclays Bank in the U.K. and a 30,000 job reduction by HSBC Bank, Europes largest.
Unfortunately, just as markets are heating up for the day, we must head to downtown Vancouver for a series of meetings, but we will follow up tomorrow morning with additional information as it is released.
As of 7:20 AM, precious metals continue their early gains with gold trading near $1,642 and silver up about $1.00 to near $40.25. Financial markets are off with the Dow Industrials and Canadas TSX Index both down about 50-60 points. Base metals are trading close to unchanged while mining share indexes are ahead by about one percent.
In other markets, crude oil is slightly higher near $95.50 per barrel; the U.S. Dollar is close to unchanged and long term interest rates are once again headed lower.