The 0.25% rate cut (to 1.00%) doled out by the FOMC on June 25 was met with something less than enthusiasm, not only in the US, but right around the world. "NOT ENOUGH!" - they cried - "WE WANTED 0.50% AND YOU GAVE US A LOUSY 0.25%!".
The reaction had been building up ever since late last week, when the suspicion began to rise that the Fed might "wimp out" and opt for the smaller rate cut. Treasury bond yields began to rise. When the 0.25% rate cut was announced, Treasury yields soared. This past week has been the worst on the US government bond market since last October (when US stock markets were making their 2002 lows).
In a twist as ironic as it is ominous, US government debt paper (and the paper of many other western governments) is being progressively shunned in favor of debt paper (ANY debt paper) which offers a superior yield. In the US, the best illustration of this over the past week has been the HUMONGOUS load of debt offered up by General Motors. GM sold $US 17.6 Billion worth of debt and received bids for over $US 30 Billion worth. The yield bonus over equivalent maturity Treasury debt ranged from 290 basis points for the three-year paper to 400 basis points for the thirty-year paper.
Since a lot (most) of this debt paper is still denominated in US Dollars, the Dollar is still going up. Since the debt paper which is being bought still offers a positive interest rate, in stark contrast to shorter-term Treasury debt which offers a NEGATIVE interest rate, Gold is once again languishing. As you probably already know, most of the "action" in Gold this year has been pushed by hedge funds and other speculators who prefer "volatility".
Volatility there has certainly been in Gold so far this year. Between December 2002 and February 2003, Gold rose $US 60 from $US 320 to $US 380. Then, in March/April, it fell $US 60 all the way back to $US 320. May saw a $US 50 rise back to the $US 370 level. And now, in June, Gold has retreated back to the mid $US 340s.
Gold is certainly NOT on the radar screens of the "ordinary investor". Ordinary investors are sticking with limpet-like tenacity to the stock market, or chasing domestic and/or foreign debt paper which offers them some kind of positive yield.
In the climax of the great stock market bull in the last half of the 1990s, nobody gave a damn about a yield. US investors were basking in capital gains. Foreign investors were basking in capital gains made even juicier by the fact that the Dollar was appreciating against their own currency. Interest rates, for the most part, behaved themselves. The Fed didn't do much "tweaking", except for the three rapid fire cuts in the wake of the LTCM scare of late 1998.
But now, things have changed a bit. US stock markets topped out more than three years ago. The $US itself topped out nearly a year and a half ago. Even the US bond bull may well have topped out over thep past couple of weeks. There are more and more dire warnings being issued in the US about the imminent demise of the housing bubble. Freddie and Fannie, the US government's "guarantor" of mortgages, are in increasingly hot water with principals resigning, books being carefully shielded from the light of day, and law suits proliferating.
What we are witnessing here is a virulent case of paper asset "deflation" - defined in the Fed's own terms as falling prices. The stock market, despite the big rally since March which is now showing signs of running out of steam, is in a well defined BEAR market. The Dollar is in an equally well defined bear market. The bond market has plummeted over the past two weeks. Very few yet want to "sell" any of this stuff. So, they are either refinancing their house or, if that has already been done (as it has in many cases) up to the hilt, they are casting around for something which gives them a positive yield.
Hence, the appetite for US corporate bonds, and junk bonds, and especially high-yielding foreign currency debt paper.
As most people see it, Gold can't help them. It doesn't yield anything, there are comparatively high transaction costs involved in buying and selling it, and it can't seem to sustain an uptrend for long.
The Fed has been very up front with their plans to print their way out of any hole they might drag the US financial system into, but this is simply not registering with most people. Not yet. Very few seem even to be reflecting on the startling fact that 13 interest rate cuts and a lending environment in which money is being given away like food stamps has not seemed to "work" this time. And VERY few can conceive of a situation in which US interest rates might actually start to go UP.
With interest rates at historic lows, debt servicing remains "supportable". With some debt instruments still paying a positive interest rate, some kind of "income" is still possible. With foreign Central Banks still buying US Dollars, the US can continue to "enjoy" its trade and current account deficits and the profligate deficit spending of the Washington Mob.
To question the soundness of the system as it is presently constituted is deemed "unhelpful". To warn of the inherent weakness of the system is deemed "alarmist". To suggest that Gold provides insurance against a systemic breakdown unmatched by any other class of "asset" is deemed hopelessly old fashioned.
And so, as the Fed lowers official rates even further into negative REAL territory, the Dollar continues its recovery and Gold takes another smack - aided and abetted of course by the "Gold markets" in which an actual ounce of real Gold seldom if ever changes hands. The latest writing on the wall, however, has been the bond bloodbath of the past seven or eight trading days. It is one of the only two "bubbles" left. Pop the bond bubble, and the housing bubble will evaporate like a snowflake in a furnace.