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To: Les H who wrote (9607)	1/5/2004 4:08:13 PM
From: Les H	Respond to of 29595

Fed Speeches Send Gold Prices to 15-Year Highs by Jes Black Gold rose above $425 for the first time in 15 years today as traders took note of this weekend's speeches by Fed Chairman Greenspan and Governor Bernake. Addressing the American Economic Association Mr. Greenspan said, There appears to be enough evidence, at least tentatively, to conclude that our strategy of addressing the bubble's consequences rather than the bubble itself has been successful. Mr. Greenspan showed no qualms about allowing the stock market bubble to inflate under his watch, and he has apparently claimed success in reflating the deflating asset bubble. In nominal terms more money was lost in 2000-2002 than during any other stock market downturn. So in nominal terms it was again inflated in 2003 along with the prices of houses, cars, insurance, taxes, fees, and cable TV. This is being touted as a recovery, but less well known is that in the last three years total outstanding debt skyrocketed by $6 trillion, or 60% of GDP, while growth rose at a rate of 3% a year. A debt to GDP ratio of 6 to 1 is unsustainable and right now being financed almost exclusively by China and Japan. Concerns over the viability of the dollar are driving the dollar lower and this election year is likely to see much of the same debt for growth if the markets are willing to comply. Questions Surround Fed Outlook on Inflation The past year's relative success in reflating the asset markets has produced a conspicuous byproduct in soaring commodity prices and soaring total debt. This is not a concern to the Fed and therefore falls off the public's radar due to government statistics showing little to no inflation and most economists' focus on debt service levels, not total debt which is at the highest ratio against GDP for both corporations and consumers. In relative terms income levels are falling sharply as the US tries to reflate its way to prosperity. And despite a recent recovery in the labor market, jobs continue to be exported abroad. Certainly, this is unlike previous recoveries and is a shaky foundation for the markets as a whole. Fed Governor Bernake said over the weekend that low inflation is his concern and that the dollar's decline and rising commodity prices are the sign of a recovery not necessarily rising consumer prices. Therefore, the Fed had the luxury to keep rates on hold as the economy picks up steam. But inflation expectations between yields on US 10-year nominal Treasury bonds and inflation-indexed Treasuries have doubled to 2.65% since 2002. That Mr. Bernake actually thinks that inflation is too low means traders saw another bright green light to continue selling the dollar, with dollar bulls harder and harder to find. Global Reflation in the Cards for 2004 The record amount of stimulus added to the market last year floated all boats. But international investors continue to worry that an increase in demand in the US will translate to a larger trade deficit, and further erode the dollar's value. This can be seen in the trade deficit widening to $US 41.8 Billion in October from $US 41.3 Billion in September as imports soared to a record level. Meanwhile, adding another deck to the house of cards are Asian central banks who continue to buy US Treasury bonds (by printing off money and thereby inflating their currencies) to support the falling dollar. In turn this global monetary inflation has allowed a one trillion dollar budget and trade deficit to be financed with little difficulty. Japan alone spent more than 200 billion dollar's last year to slow the dollar's decline against the yen, and the Japanese monetary authorities plan to spend twice that amount this year to support the dollar. Next year's twin deficit is expected to be just as onerous. Unmistakably, the process of financing balance of payments deficits in the US has also allowed the central banks of both China and Japan to nearly double their money supplies in 2003. China is now overheating but Japan edged out of deflation with its annual inflation rate positive in October for the first time since 1998. Gold At Breakout Stage With gold prices above $425 the next significant resistance level is seen at $450. Above here would likely see the dollar index fall from current levels at 86 and trading near its all time low of 78.19 and the euro trading at or above $1.30. At this point the markets would likely begin to worry about a dollar crisis that could get out of control. Recall that this was the very backdrop in 1987, only this time the US is the world's largest debtor nation. While US deficits may continue to be funded by Asian central banks, it may take a sharp rise in bond yields (wanted or not) to stop the dollar's decline. forexnews.com