"There's no denying it, the $US Gold charts look shaky and are at critical support levels. On the other side, we have indisputable proof that many non-US investors are expecting an upmove on Gold - soon. The last time they did so, they were proven right."
(Gold Commentary - August 4, 2000
That "critical support level" was (just above) $US 270. This week, Gold challenged it again. On August 23, the spot future intra-day low was $US 271.00 and Gold closed for the day at $US 271.10 - just $US 0.40 below the year 2000 low spot future close of $US 270.70 set on May 25. And just as it did in late May and in early August, the $US 270 level has held - so far - with Gold closing for the week at $US 274.10 (see above).
Of course, August 23 (when Gold hit its low) was the day after Mr Greenspan and the FOMC got together and decided not to mess with U.S. interest rates. The last time that the Fed DID mess with rates was May 16 - when they raised the Fed Funds by 0.50% to its present level of 6.50%. Now, politics has intervened, and the chance of another rate manipulation between now and November looks (to put it politely) unlikely. There's only one more FOMC meeting between now and November 7.
We refer, of course, to the mighty U.S. Dollar, the currency that the world can't get enough of. The U.S. carries the highest external net debt in the world. It is setting records on the size of both its monthly trade and current account deficits with monotonous regularity. In June, the U.S. saw its export volume stage the biggest one month leap for four years - the trade deficit STILL set a record. No matter, the world WANTS U.S. Dollars!
The appetite for Dollars is insatiable. Everyone, almost everywhere, wants to get in on the action inside the U.S.. The demand for Dollars to buy U.S. physical assets and especially U.S. stocks shows no signs of slackening yet, despite the fact that U.S. markets have been running on the spot, and the fact that the Dow is presently showing no gains at all from its levels a year ago.
When the FOMC announced that they were standing pat on August 22, the reaction was another jump in the Dollar. The interpretation both inside and especially outside the U.S. is that everything must be fine. U.S. "growth" (5.3% in the second quarter) is not "inflationary". If it was, the Fed would have raised rates, right? That means that the U.S. markets are poised to resume their climb (any day now) and that the glorious boom will go on forever.
Since everyone knows that the Fed is an "independent" agency, no one gave a thought to the notion that politics might have entered into their decision to do nothing. And even if they did, it is a known fact that U.S. markets NEVER go down in presidential election years.
If you examine the relative performance of Gold and the $US index since Gold hit its 2000 low in late May (Privateer subscribers can do so here), it becomes crystal clear that both are approaching a critical level - which may or may not prove to be a turning point.
The Dollar has had a great run so far this year, interrupted only by a brief correction in June. Gold, on the other hand, rallied in February when several large U.S. Gold miners threatened to curtail their hedging activities (and didn't carry through), and rallied again in June. That June Gold rally was the mirror image of the $US June correction".
For the past two months, the $US has been trying, without success so far, to rally back above its May 2000 highs. Gold has been trying, equally without success so far, to drop below its May 2000 lows. The turning point for both Gold and the $US came shortly the last time that the Fed raised U.S. rates (on May 16). The Fed has had two opportunities to raise some more since May, and has let both of them pass by. This has been interpreted as an indication that all is well with the U.S. economy - the Dollar has rallied - and Gold has subsided back towards its lows for the year.
But the Dollar stubbornly refuses to crack its May highs, and Gold stubbornly refuses to crack its May lows. There can be no guarantees, but all indications point to the conclusion that unless and until the first happens, the second will not happen. Further, the likelihood is high that if the Dollar does NOT manage to get above its May highs soon, it will start to weaken again. And if that happens, the almost certain direction for the $US Gold price is UP.
It is true that the Dollar "should" not be as strong as it is. It is equally true that if the Dollar was anything else except the world's reserve currency, it would have crashed and burned long since, carrying the debt burden that it does. But the Dollar IS the reserve currency. It IS the currency that the world needs to buy most raw materials, including oil. And it IS the currency of the nation whose economy is still seen to be the strongest in the world.
How long will this last? Impossible to say. The entire equation is further complicated by the Presidential elections between now and November. But the fundamentals underneath the Dollar are weakening with each new monthly trade and current account deficit, and the attraction of the U.S. as the ultimate investment haven is weaking with each month that the markets refuse to regain their levels of earlier this year.