We have asked variations of this question before, but in the wake of the Fed's decision of November 6, it is highly appropriate to ask it again. What would you expect would be the fate of the currency of a nation which:
You would expect the currency of such a nation to be losing exchange value against other currencies, would you not? Of course, the nation is the US, the currency is the US Dollar, and the US Dollar IS losing value against other currencies. On Friday, November 8, the US Dollar index closed at 104.68 - down 0.45 points on the day and only 0.26 points above its 2002 low close of 104.42 set on July 19.
"You know that if the Fed cuts rates, it will be admitting to anyone with eyes to see that all the talk about US "recovery" was so much hot air. WHY CUT RATES IF THE US ECONOMY IS IN RECOVERY AND IS GROWING? You also know that if the Fed cuts rates, the chances are VERY high that the U.S. Dollar will fall, quite possibly precipitously."
(Gold Last Week - November 1)
Over the week of October 28 - November 1, the $US index fell 1.92 points from 108.17 to 106.25. This past week - November 4-8 - the $US index has fallen 1.57 points from 106.25 to 104.68. All this is after a two month period in which the $US index hardly moved at all. The Dollar fell in anticipation of a rate cut. It fell further when the rate cut was bigger (0.50%) than was generally expected (0.25%). US stock markets rose in anticipation of a rate cut, but they did not go on rising when given the rate cut, they fell.
And Gold? Well, let's look at the record. Over the two weeks between Oct. 25 and Nov. 8, the $US index fell from 108.17 to 104.68. That's a fall of 3.23%. Over the same two weeks, the $US price of Gold rose from $US313.40 to $US 321.70. That's a rise of 2.65%. The rise of Gold in $US terms is lagging the fall of the $US in terms of the currencies of its major trading parties.
Now, please examine these charts in the order in which they are listed. Each chart will open in a new window: First - these three charts
Please note that Gold in terms of all three of these currencies is challenging its trendlines. In the case of the Euro, Gold is back to the bottom of its post 1999 uptrend. In the case of the Aussie Dollar, Gold is inexorably pushing BELOW its uptrend.
Now, take a look at these two charts:
On the bar chart of Gold in all four currencies, you can see that Gold is challenging both uptrend and long-term (20-week) moving averages on the Euro, Yen, and $A charts. Only on the $US chart is Gold comfortably above both its trendline and its moving average. And finally, Gold on the $US (point and figure) chart is stalled in a rise back towards its 2002 high (close) of $US 327.80 set on June 4. Right now, the $US index is 0.25% above its 2002 low. Gold in $US terms is 1.86% below its 2002 high. Gold is lagging in $US terms. In terms of the other major currencies against which the $US is falling, Gold is threatening long-term uptrends.
Now, if the US was a "banana republic", its currency would have dived a LONG time ago. Its Central Bank would NEVER have gotten away with lowering controlling interest rates to 40 year plus lows. But the US is NOT a "banana republic", even though its economy bears many similarities to one. The US is the world's only superpower, and purveyor of what remains the world's only reserve currency, although the Euro has legitimate claims to compete on that basis.
The "holding down" operation on Gold is best seen not by studying a chart of Gold in $US (the chart that almost everyone watches), it is seen by studying Gold in terms of the currencies against which the $US is now falling. Here, we can see clearly that if Gold is held comparatively flat in $US terms and the $US keeps falling, then Gold will fall BELOW its uptrend in terms of Euros and Aussie Dollars and will slump back towards it in terms of Yen.
This goes to the heart of the proposition that Gold is, to quote the Europeans, a legitimate reserve asset. ALL monetary systems for more than two millennia have been built on a foundation of Gold (and/or silver). The present fiat system with no official connection to Gold is, in historical terms, a short-term anomaly. Gold found support in $US terms two weeks ago when it turned up from the $US 310 level. It is now searching for support in terms of the currencies against which the $US has been falling for those two weeks.
We think it will find this support. If (when?) it does, and if (when?) the $US keeps falling and sets new 2002 lows on the $US index, Gold will mount its run to equal and surpass the $US 330 level which has stood as a barrier for five months now.
A war (against Iraq) might slow this process, or it might speed it up. But in terms of the economic and financial position of the US, nothing has changed, it continues to deteriorate. What HAS changed over the past two weeks is that now, the $US is reflecting this deterioration. So are US interest rates, for the simple reason that if the Fed saw ANY other way to ameliorate the situation, they wouldn't have cut, especially not by 0.50%, on November 6.
The pressure "under" Gold, especially $US Gold, is now IMMENSE. There is plenty of room for Gold to correct in $US terms without violating its uptrend. There is no room at all for it to correct in terms of other major currencies. We do NOT expect these non $US uptrends to be violated. That can only mean a lift from present levels in these currencies for Gold. Unless the US Dollar can "recover", that in turn will mean an even bigger lift for Gold in $US terms. Stay tuned, it could become VERY interesting between now and Christmas.