It is now a month since the Fed raised official US rates for the first time in four years. For the first half of July, the Dollar fell. By July 16, the $US index had reached a post February 2003 low. Then came the week of July 19 - 23, in the middle of which Mr Greenspan gave two days of testimony to Congress. By July 23, the $US index had climbed from 97.30 to 89.46. This week, (July 26 - 30) the climb has been a bit more subdued, but the $US index is up again, closing on July 30 at 90.11, having regained the 90 level for the first time since May 24. Gold? It's up $US 0.50 on the week.
As stated in our main Gold commentary this week, currency traders are saying that the Dollar is continuing to strenghten almost solely on the "credibility" of Mr Greenspan's Congressional testimony which foresees more robust US economic growth during the second half of 2004. Since during most of the second half of 2004, the Presidential race will be on in earnest, it is a very safe bet that the best slant possible will be put on US economic growth, whatever the actual state of affairs.
Here are the relative performances of $US Gold, the $US Index, and the Dow since Gold broke above $US 300 to stay on March 27, 2002:
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If you doubt that Gold's breaking back above the $US 300 barrier to stay in March 2002 was a "sea change" for world markets, a glance at the percentages in this table should settle the matter beyond all reasonable doubt.
On the daily bar chart, you can see that after the big fall last week, Gold has "consolidated" at right around the same level it based in early June. The price is now back below both 10 and 20 day moving averages and the shorter-term average has crossed back below the longer-term one. Encouragingly, the price broke above this week's trading range on July 30 to poke back above the $US 390 level.
The most important feature on the weekly chart is the fact that the 40 week moving average is now firmly above the 20 week moving average - you can see this more clearly, and get the relevant numbers - on the longer-term weekly chart. The more important it becomes to put the US economy, and the US Dollar, in the best light possible, the bigger the struggle the US Gold price is having. You can see this clearly in the weekly action since Gold's 2004 lows set back in May.
The point and figure chart has keeled over from its distribution zone in the mid $US 400s and has slid all the way back down to just below the uptrend line. With the $US 4.00 gain on Friday, the chart has turned up again and now rests just below the line.
This action makes the week's closing low of $US 387 very important. If Gold turns down again on this chart at any level below $US 400 and then goes on to set a low three "X"s below the $US 387 low (a close of $US 384 or lower) then we may well see a challenge to the 2004 lows in the mid $US 470 area. Conversely, the longer the price stays ABOVE the green uptrend line, the better for a resumed upmove.
Here's another perspective - a comparison between Gold's 2002 low and its present price and the $US index 2002 high and its present "price". All data is on CLOSING levels:
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The pressure which the international financial system is under is well illustrated by the growing "shear" between the $US oil price and the $US Gold price. Oil set new highs on Friday, rising $US 1.05 to $US 43.80. Gold did nothing on the week, while rising $Us 4.00 on Friday. In regard to Oil, the problem is that it is not only traded on the paper markets, the real thing is also consumed. Gold is unique as an economic good in that because of its historic role as a medium of exchange it is NOT consumed but can be reused over and over again.
That makes its "price" as expressed in paper Dollars (or any other paper currency) much easier to control. The only thing the monetary authorities can do about the oil price is to banish "energy costs" from their calculations of price inflation. With Gold, they can exchange paper claims to the metal and pretend that the result is a "price" for Gold.
Their problems will REALLY start when enough people decide that a paper "claim" to Gold is no longer sufficient, they want the real thing. All that is waiting on now is any renewed weakness of the US Dollar. And all THAT is waiting on is the inexorable erosion of Mr Greenspan's "credibility" as the differences between the REAL economy and the world of economic data continue to build.