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REFLECTIONS: Golden Problems
by Carlos Mock

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The recent dramatic rise in the gold price caught everyone by surprise. Many had been expecting a short-term decline in the gold price. Instead, they were caught by a sudden wave of buying on the Tokyo futures market. At one point, gold was trading at a 24-year high of $526/ounce.

While the immediate rise in gold has really been a decline in the yen, the rise in the price of gold is a sign of the markets' displeasure with all the major developed world currencies.

In May, it had been the turn of the euro. The failure of the ratification process for the European Union constitution was followed by the year's first move up in the gold price. Then, in August, came the rapid decline in confidence in the Bush administration. With the talk of huge reconstruction spending after Hurricane Katrina, the open-ended, seemingly futile commitment to Iraq, and the dubious appointment of a White House staff member to the Federal Reserve chairmanship ( 'good job Brownie' ) , the traders waved in gold purchases.

The truth is that all the major currency areas are burdened by debt and deficits. Furthermore, the chronic developing world debt crisis has now been turned on its head. The real debt problem is the Third World's ( mostly China ) growing holdings of shaky rich world debt. The developed currencies need to be collectively devalued relative to those of the rising powers.

The Financial Times also reported that U.S. Treasuries rose, sending yields lower, after a disappointing $8bn sale of 10-year paper. The real yield curve, which plots the yield on different maturities of U.S. inflation-protected bonds, or Tips, continued its flattening trend and inverted. The yield on 30-year Tips fell below the five-year yield to its lowest level since July 2000. Most analysts predict that the market is hardening expectations for continued tightening by the U.S. Federal Reserve.

Even though the technology of finance has made enormous progress since the inflation and financial crises of the 1970s, the signs for a future recession—both the rise in the price of gold and the inverting of the yield curves—point toward hard times in the near future.

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