For three weeks, we have been writing about Gold support at or just below the $US 280 level. This week too, $US 280 was the operative number, until November 8 when the ECB and the Bank of England cut their rates, following dutifully behind the Fed which had done so two days earlier. On that day, Gold dipped below $US 280 yet again, falling $US 4.20 on the day to close on a spot future basis at $US 277.10
Thus, Gold has been flirting with the $US 280 level for a month now, more or less ever since the bombing war started in Afghanistan. And at the same time, U.S. stock markets have been clawing back the huge losses they suffered during the week of September 17-21. On Friday, the last of the averages not to have regained its pre 9/11 level - the Dow - finally got there.
So, the financial damage caused after the terrorist attacks has been "fixed". The markets have made up all their losses and Gold has given back (most of) its gains. The economic situation continues to deteriorate almost daily, but this is NOT registering on financial markets.
How long this can continue is impossible to say. The latest financial statistic was the U.S. Producer Price Index (PPI) for October, which dropped 1.6% - the biggest monthly drop for 54 years. Almost all of this precipitous fall was made up of falls in the price of gasoline and heating oil. Most interestingly, since November 6 (the day that the Fed cut rates), the spot future price of oil has rebounded from $US 19.92 to $US 22.22. That's up $US 2.30 or 11.55% in three days.
Prices fall when supply outstrips demand, and/or when new and more efficient production methods reduce the cost of supplying a given good or service. Prices rise when demand outstrips supply, and/or when supply capacity is curtailed. Of course, when "floating currencies" enter the picture, this simple recipe is complicated out of all recognition, not least because of the "laying off" of risk through the use of derivatives of ever-increasing levels of "sophistication".
We know that new "money" is being produced at phenomenal rates. Since September 11, the U.S. "MZM" (Money of Zero Maturity) measure has been expanding at a breathtaking annualised rate of 35%. Since September 11 too, the Fed has cut U.S. rates by 1.50% and the U.S. Treasury has decided to cease to issue long (30-year) bonds. That's one way to get longer-term interest rates (the ones over which the Fed has no direct control) down.
All of this is serving to keep U.S. financial markets on a more or less even keel, an absolute pre-requisite because the U.S. is in a state of WAR - against "terrorism". Stock markets have regained their losses. Short-term rates are actually negative. The Dollar is steady. And Gold is showing no signs of moving up.
That is the situation, just as it has been for the past four weeks. Gold has bottomed. It is in an uptrend. But it has NOT established a bull market. Meanwhile, the economic situation, inside and outside the U.S., continues to worsen and investors, again both inside and outside the U.S., continue to ignore it.
This situation may be induced to prevail for the rest of this year. It will NOT prevail for the rest of NEXT year. We shall see.