Gold Last Week (Plus Archives)
In any discussion of the future of Gold, or of the price of Gold, the first thing that must be realized is that Gold is a POLITICAL metal. In the true meaning of the word, its price is "governed".
This is so for the very simple reason that Gold in its historical role as a currency is fundamentally incompatible with the modern worldwide financial system.
Up until August 15, 1971, there has never in history been an era when no paper currency was linked to Gold. The history of money is replete with instances of coin clipping, printing, debt defaults, and the other attendant ills of currency debasement. In all other eras of history, people could always escape to other currencies, whose Gold backing remained intact. But since 1971, there is NO escape because NO paper currency has any link to Gold.
All of the economic, monetary, and financial upheaval since 1971 is a direct result of this fact.
The global paper currency system is very young. It depends for its continued functioning on the BELIEF that the debt upon which it is based will, someday, be repaid. The one thing, above all others, that could shake that faith, and therefore the foundations of the modern financial system itself, is a rise (especially a sharp rise) in the U.S. Dollar price of Gold.
With 25, 50, and 200 day Moving Averages
09/29/2008,1600,887.800,909.500,881.000,894.400,190452,357751 09/30/2008,1600,898.700,899.500,879.000,880.800,150240,336598 10/01/2008,1600,876.500,898.500,876.500,887.300,124466,337554 10/02/2008,1600,871.000,872.800,835.000,844.300,162273,332541 10/03/2008,1600,842.000,847.000,825.000,833.200,141741,0
The US financial and political establishment and the powers that be in both politics and banking had a huge shock handed to them on Monday (September 29) when the US House of Representatives actually voted down the $US 700 Billion rescue package for the US banking system. After a week of frantic bargaining and a weekend of huge political pressure laced with dire warnings of the end of the world if the House was to do such a terrible thing, the House actually said NO!
That new found fiscal "rectitude" didn't last long. The bill was shunted off to the Senate on October 1 and breezed through. Don't forget, only one-third of US Senators are up for re-election on November 4 - the whole House faces the voters on that day. Both presidential contenders came out in favour of the bill too, of course. And bankers, central and otherwise, throughout the world professed themselves amazed and "perturbed" that a government could do such a thing as to take a step towards holding them responsible for their own actions.
On October 3, the bailout bill, having muscled up from the three pages which Mr Paulson originally presented two weeks ago to a telephone book like tome of 451 pages, went back to the House. Needless to say, nobody - including those charged with its drafting - had read it. The House duly passed the bill and it was signed into law by President Bush the same day. The US banking system has its bailout plan, officially known as "TARP" or the "Troubled Asset Relief Program".
Now, in relation to the passage of this bill and the potentially huge burden it places on US taxpayers, here are two more items to consider - carefully:
First: On September 29, the day before the end of the US Fiscal year, the US Senate finally got around to passing a $US 634 Billion "spending bill". This was necessary to give the government "permission" to go on spending on October 1. It was also necessary to avoid a lame duck session of the US Congress between the election on November 4 and the inauguration of the new President in late January next year.
Second: As already mentioned, September 30 was the end of the US fiscal year. And what a year it was! The US Treasury's "debt to the penny" page shows the following data: On the last day of fiscal 2006-07, September 28, 2007, the Treasury's "debt to the penny" stood at $US 9.007653 TRILLION. On the last day of fiscal 2007/08, September 30, 2008, it stood at $US 10.024724 TRILLION.
Thus, in one fiscal year, official US Treasury debt increased by $US 1.017071 TRILLION - that's right - OVER $US 1 TRILLION - with the official budget deficit put at less than half that.
It is, or certainly should be, that the US political and financial powers that be are doing everything conceivably possible to stave off the collapse of their fiat money system. They banned short selling in financial stocks for the second time since July on September 22, the second ban due to expire on October 2. On October 3, the ban was still in place. Late in the evening, the SEC said that the ban would now expire after markets had closed on Wednesday, October 8 - three days after Mr Bush signed the bailout bill into law.
Needless to say, short selling is not seen as a bad thing in all markets. On the commodities markets, for instance, nobody has a bad word to say about any type of short selling, including the "naked" variety so villified elsewhere. Oil is below $US 95.00. Metals have universally tanked. Gold dived precipitously on October 2, the day after the Senate passed the bailout bill, falling $US 43.00 on the day and a further $US 11.10 on October 3. Gold is not necessary to keep the financial and banking system functioning in the way that the powers that be want it to function. It is merely money.
The US Dollar has soared again this week as Americans desperately repatriate every investment they can sell overseas and bring the money home. Treasury yields are falling again as Americans who already have some money left at home flee the stock market and almost every other market for the "safety" of US federal government debt. Meanwhile, as already stated, that same government debt has increased by more than $US 1 TRILLION - for the first time ever - over the fiscal year which ended this week.
Truly, the financial world is a fantastic spectacle as we enter the month of October.
As you can see, the price action on this chart took Gold well below the uptrend line which has supported the entire bull market from its start in 2002. We also have descending lows on the chart - the $US 1000 high set in March and the $US 975 high set in mid July. Gold slid all the way down to the $US 750 level on this chart just three weeks ago. And then the HUGE rebound which has now reversed this week as the drama around the passage of the bailout bill unfolded.
We began the table below in 2007 and have extended it into 2008, even though Gold in all four currencies in the table remain well above their 2006 highs. Gold breaking out to new all time highs in $US terms at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold improved upon those January levels in all four currencies as spot future Gold closed above the $US 1000 level for the first time ever in the middle of March.
Two months ago, we had a new entry on the table for the first time since Gold topped the $US 1000 level in March. On July 17, Gold rose to 103233 Yen. That was a new 2008 high for the metal in terms of the Japanese currency. Then the Fannie/Freddie bailout plan went to work. On October 8, with the announcement of co-ordinated interest rate cuts by SIX major world central banks (including the Fed), Gold hit new all time highs in terms of the Australian Dollar, the Euro and many other major world currencies.