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We’re Back – Did We Miss Anything?
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(August 11, 2008) While we were away for a week, gold lost 5.6% of its dollar value, continuing a downward trend from its most recent peak on July 15th, a scant 18 trading days ago, when gold was some $135 higher than on Friday 8/8/08.
A number of factors affect the price of gold, but the dramatic drop in oil prices from their peak on July 11 at around $147 per barrel, all the way down to some $115 on Friday has pretty much paralleled the move in gold.

The dollar has also strengthened considerably over the past few weeks, trading now closer to $1.50 per euro rather than the $1.60 we saw just last month. This past Friday the dollar soared against the euro, on evidence that, due to recognition of a slower European economy, interest rates in the euro market are not likely to being going up anytime soon.

Seasonally, the month of August tends to be one of weakness in the gold market –another of the wide range of factors affecting the psychology of world gold markets.

As always, our prediction is that gold prices will fluctuate, and our recommendation is that it should be bought when the world, for whatever reasons, is in a cycle of ignoring and discounting it.

I spent part of our week off reading the latest page-turner from Kevin Phillips, entitled Bad Money, Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism.

It is true that ‘big theme’ books about current crises tend to suffer from short shelf lives, and often seem dated fairly quickly – sometimes as soon as the ink dries. But Mr. Phillips has been at this game for some thirty years (this is his twelfth book on economic subjects), and for the most part, he avoids the traps endemic to crisis-of-the-day books.

Bad Money is about the US, its oil history, the history of the post-gold dollar and its fading role as the world’s reserve currency, our current credit and housing crises and how they play out internationally, and the failures of our politicians and government institutions to deal with the world as it is today.

In short, Mr. Phillips offers a thorough summation of the place of America in the world, circa 2008. For the US, it’s not a pretty picture.

Oil is a big subject in Bad Money. Mr. Phillips’ book outlines the oil strategies of the world’ oil producers (notably the Middle East, Russia, Venezuela) and its oil consumers (chiefly China, Indian, and the US). The simple truth is that the US consumes about 25% of the world’s oil production, about 70% of which it buys from other countries, paying with dollars. Only the relative strength of the dollar as the world’s reserve currency for most of the 20th century made that trade possible. So what now?

Mr. Phillips is no fan of the Bush administration (read his earlier book, American Dynasty for more details on that), and its actions in the Middle East, especially Iraq. But he is more the hardened realist rather than squishy idealist. He has no quarrel with the US adventure in Iraq, with its goal of securing oil supplies, but he is highly critical of the ill-founded tactics and strategies used, their inevitable blowback throughout the Middle East, and the subsequent obliteration of America’s good standing in the world at large due to demonstrable incompetence on such a grand scale.

The book also spends a great deal of time documenting (and bemoaning) the alteration of our economy from one based on manufacturing to one based on financial creativity. He points out that this hollowing out of our economy, and the ascending influence of banks and Wall Street hybrid financial institutions over Main Street concerns, is key to the fragile state which we are in today.

August 2007 saw the beginning of the current credit crisis in the US, which will no doubt be a milestone in future histories of the world economy, just as the Crash of 1929 set the tone for the Depression of the 1930’s. Bad Money is, at this time, the most well- researched, readable and revealing book available that details our country’s current place in what Mr. Phillip’s calls the global crisis.

The book doesn’t preach, prescribe, or offer a program of easy answers. As Mr. Phillips states in the preface, “The most worrisome thing about the vulnerability of the U.S. economy circa 2008 is the extent of official understatement and misstatement – the preference for minimizing how many problems there are and how interconnected they are.”

Mr. Phillips is not optimistic about our situation, and reading this book will certainly not make you feel any better. But it is frighteningly informative, and I recommend it highly.


 

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