The second down week in a row. This week, spot future Gold fell $US 4.80 and dipped below $US 280 on October 18 when it closed at $US 278.90. Take a look at the point and figure chart. On August 17 (before 9/11), spot future Gold closed at $US 279.30. The close on October 18 almost precisely duplicated that level. Since the August 17 close was the highest since the May "spike", $US Gold has found support at or just below the $US 280 level.
The fact remains that Gold's flirtation with $US 300 is over, for the moment. Part of the reason is the "recovery" of world stock markets since the disastrous week of September 17-21 when the Dow established its bear market. Part of the reason is that short-term Gold lease rates are at multi-year lows. On top of that, all rates bar the one year rate (one-month, three-month, six-month) are now UNDER 1.0%. We haven't seen that since last February.
On the surface, this seems reasonable. After all, back in February, the Fed Funds rate was still 5.50%. It is now 2.50%, and the Fed has been making reserves available to the banks at rates well under 1.00% since 9/11. Why shouldn't Gold lease rates be low?
They shouldn't for the precise reason that the Fed has lowered their funds target rate to the vanishing point and the U.S. government is planning huge stimulus spending packages and a return to "official" budget deficits. All this is, by primary definition, INFLATIONARY. An outlook of inflation, with the correspondent lowering of purchasing power for the currency being inflated, should build a risk premium into the lease rate for Gold, as it should into the yields being offered for government debt paper.
Quite clearly, this is not happening for Gold. Just as clearly, it IS happening for Treasury debt paper - especially longer-term Treasury debt paper. The 30-year bond yield, for example, has barely moved from its level of the start of the year, despite all the Fed rate lowerings in the meantime.
Old habits are dying exceedingly hard. Despite the fact that the U.S. stock market as measured by the Dow is down by 14.7% this year and Gold as "measured" by the U.S. Dollar is up by 2.4% over the same period, Gold is still seen as by far the superior "shorting candidate". Why else would the U.S. "funds" still be shorting it so enthusiastically?
But when people are concerned for their actual physical safety, as they are in the U.S. and increasingly in other nations, thinking clearly usually takes a back seat. That is what is proving to be the case at present. We shall have to see how long it lasts.
As we said at the start of this week's installment, Gold has found support at or just below the $US 280 level. Gold lease rates don't have much further to fall. Open interest on the Gold futures has fallen significantly this week. In normal circumstances, we would expect a rebound over the coming week.
The caveat: The U.S. and its "allies" are at WAR. And war is never "normal circumstances" - ESPECIALLY for Gold. Stay tuned.