The Dangerous Month Of MarchThe Dangerous Month Of March
As we reported when it happened, the US Treasury's "debt subject to limit" hit $US 8.173975 TRILLION - $US 25 million below the $US 8.184 TRILLION debt limit - on February 16. It has not moved since. Now, Mr Snow and the US Treasury have reported to Congress that they will run out of money (or more precisely the ability to borrow money) on March 20. They will run out, that is, unless the Congress (the House and the Senate) pass a rise in the debt limit - or - abolish it altogether. Congress has two weeks to do something about this. The Congressional recess is planned to start with the close of "business" on March 17.
Please note the day when the Treasury says it will run out of borrowing capacity - March 20. That day happens to be the same day when the Iran oil bourse - trading oil in Euros and NOT US Dollars - is due to open. Three days after that, the US plans to end their reporting of broad money (M3) numbers. And five days after that, on March 28, the Federal Open Market Committee (FOMC) meets for the first time with Ben Bernanke at the helm of the Federal Reserve.
March has not exactly come in "like a lion" on global financial markets, but it has been interesting. First and foremost has been the decision by the European Central Bank (ECB) to raise its rates by 0.25% to 2.50%. This is only the second ECB 0.25% rate rise in the past five years. The Fed has raised rates in fourteen 0.25% increments since June 2004 from 1.00% to the present 4.50%.
Given the myriad of events, both actual and potential, which will pile up as the month progresses, we don't thing there is any chance at all that March will go out "like a lamb" this year on financial markets. And the precious metals, Gold AND Silver, are giving advance warning of this.
On March 2, the spot future Gold price closed at $US 570.40 - only $US 2.40 below the bull market spot future closing high of $US 572.50 it set a month earlier on February 3. Silver has done better still. On March 2, the spot future Silver closing price soared $US 0.41 and broke above the $US 10.00 level on a closing basis for the first time since March 5, 1984! $US Gold is on the brink of a new bull market high. $US Silver is at a new bull market high.
The other point to ponder is US Treasury yields First of all, the yield curve is inverted. Then there is the height of yields. On February 22, the yield on the newly-reinstated 30-year bond dipped to 4.48% - that's two basis points BELOW the current Fed Funds Rate which is 4.50%. Absolutely amazing. Since then, the 30-year yield has been going up - and this movement was accelerated somewhat by the announcement of the ECB's rate rise (see above) on March 2. As we report in the Early March issue of The Privateer (published on March 5), Japan now has a trade deficit, brought on by Japanese consumer spending brought on in turn by gigantic levels of credit creation by the Japanese monetary authorities. Japan is VERY likely to abandon its "zero interest rate policy" soon and start raising rates. If this doesn't happen in this fiscal year - which ends in Japan on March 31 - it will happen pretty early in the next financial year.
Rate pressures are rising all over the world and more and more countries are succumbing to them. The Bernanke Fed will not be able to resist them, and even if they do stop raising official rates, they will not be able to hold down longer-term Treasury yields. There is no sign of any slackening in US federal government deficit spending. If anything, it is likely to increase in an attempt to compensate for the tapped out American consumer, who is pulling in his and her borrowing horns with increasing speed.
All this will put inexorable pressure on the US Dollar, and a break of some magnitude is a matter of when, not if. As already stated, $US Gold has almost regained its bull market highs this week while Silver has broken above the $US 10 level for the first time in more than twenty years. We have said many times over the years in these commentaries and in The Privateer that ALL instances of rapid acceleration in precious metals prices come with RISING interest rates. This is very simply because in a fiat paper currency world, rising rates and especially rapidly rising rates reflect a growing unease about the future purchasing power of the currency in which the rates are denominated.
Given the sequence of events and potential events over the next month, it would take a "heroic" level of self-induced blindness to not recognise the potential for a swoon in the US Dollar. Indeed, the longer it is "postponed" by frantic Central Bank action, the bigger it will be when it finally hits. We are on the brink of another upleg in the $US bull market. When it occurs, whether next week or next month (we don't think it will take any longer than that), it will NOT be accompanied by a rising or even stable US Dollar. This time, we think that Gold and the US Dollar are going to go in opposite directions, just as they did in the first three years (2002 - 04) of the current Gold bull market.