Addendum: Monday, September 22, 2003
"The first thing that has to happen is that the February 4 entry has to be knocked off this list. According to an IMF official, speaking on the eve of this weekend's IMF meeting in Dubai, that could happen at any time."
(Gold This Week - September 19 - see below)
The entry for February 4 has been knocked off the list. For the effect that has had on Gold - take a look at this chart - and this one. The second chart in particular - the $US 2 x 3 point and figure chart - confirms that the February/September 2003 correction is OVER and that Gold has established a second upleg in its post April 2001 Bull market.
Over the past two trading days, Sept. 19 and 22, the $US index has fallen 2.18% (from 96.31 to 94.21) and $US spot future Gold has risen 2.79% (from $US 376.70 to $US 387.20). The IMF plus G7 meeting in Dubai over the weekend has come and gone with nothing resolved. The Bank of Japan has LOST their nine month fight to keep the Yen down against the $US. The Chinese have rebuffed all US efforts to pursuade them to "float" their currency. Mr Bush addresses the UN tomorrow (Sept. 23) to ask for financial (and military?) help in Iraq. The cracks in the foundation are widening.
The effects of the Bank of Japan losing its fight to prop up the Dollar have been instantaneous. On September 22, the Nikkei lost 4.0%. Significantly, Gold rose $US 5.00 at the Asian opening on September 22 and did NOT lose those gains in European or US trading. Back in February, Gold rose to $US 390 in Asian trading on February 5, the day after it hit $US 379 on a spot future close in New York. By the close of trading in New York on February 5, the spot future Gold price had fallen to $US 376.40 - the start of a descent to an April 7 correction low of $US 321.50.
That correction has now been wiped out, and a new upleg on the $US Gold bull market confirmed. In February, Gold established significant highs in terms of ALL major currencies. Now, although Gold has established a new high in $US terms - closing at its highest levels since August 30, 1996 - it is still far below its 2003 highs in terms of other major currencies, including the Euro, the non Euro European currencies, the Canadian and Australian Dollars, and the Yen.
With $US Gold now having established a new upleg in its bull market, resistance can be found at these levels - all on a spot future CLOSING basis:
Spot future Gold has not closed above $US 510 since April 7, 1981. Its last close above $US 600 was on December 24, 1980. Its last close above $US 700 was on September 24, 1980. And its last close above $US 800 was on January 21, 1980, the day when Gold hit its all time high spot future close of $US 850.00.
Again, we update the list showing the five highest spot future Gold closing prices of 2003 so far. Here is the list from last week - to September 12:
Here is that list brought up to the close on September 19:
As you know, the spot future Comex Gold price hit a new 2003 high last week. It hit another one this week, rising $US 5.20 on Friday, September 19 to close ten cents higher than its September 9 close. $US Gold has set its four highest 2003 closing prices over the past ten days, but NONE of them are yet far enough above the February 4 high to be decisive. The first thing that has to happen is that the February 4 entry has to be knocked off this list. According to an IMF official, speaking on the eve of this weekend's IMF meeting in Dubai, that could happen at any time.
The story was reported in the Guardian newspaper. IMF chief economist Kenneth Rogoff stated that the US could not continue to run a current account deficit of 5% of GDP. This is not earth shattering stuff, in fact, it is obvious on the face of it. It is significant, however, that an IMF official should choose to mention it on the eve of the IMF meeting. It is even more significant, given the currency action of the past week.
Consider the exchange rate of the Japanese Yen against the $US since the start of 2003. Consider as you examine this list, that the Central Bank of Japan (BOJ) had spent $US 80 Billion, more than it has ever spent in any full year, propping up the US Dollar as of the end of August 2003.
As you can see, for the first eight months of 2003 (January to August), the BOJ was successful. The Yen maintained a very tight trading range throughout that period and was almost exactly the same at the end of August 2003 as it had been at the beginning of January 2003. Now - look at September - and specifically at the week of September 15 - 19. In the eight and a half months between January 1 and September 12, 2003, The $US fell from 118.81 Yen to 117.28 Yen. In the SINGLE WEEK of September 15 - 19, the Yen rose nearly twice as much as it had in the preceeding 8 plus MONTHS as the Dollar slumped from 117.28 Yen to 114.00 Yen.
Here is Mr Rogoff's "sharp drop" in the Dollar, happening right in front of his (and our) very eyes. What is MOST significant here is that for all of 2003, it is the Japanese through the Bank of Japan who have been most prominent as supporters of the US Dollar. The BOJ has been the latest, and biggest, in a long line of Central Banks which have tried to "buck" the currency markets. Right up until a week ago, they had been "successful" - albeit at an excruciating cost. This past week, with the cost no less excruciating, THEY HAVE FAILED.
The situation is being explained away by the Japanese in this fashion. They do not wish to do anything to perturb the IMF meeting this weekend, so they have not been intervening in the currency markets. The currency traders, on the proverbial other hand, expecting the Japanese to take this line, have been buying Yen hand over fist to see how far they could push the BOJ before it would respond. Judging by the action over the week, they can push pretty hard.
In this context too, it must be remembered that US Treasury Secretary Snow was in Japan (and China) earlier this month and that the Treasury's new found "policy", as articulated by Mr Snow, is that currencies should not be "interfered with" by Central Banks but should be left "free" to find their own levels on the market.
The upshot of all this, so far, is that the BOJ has not intervened (at least they have claimed not to have intervened) in the leadup to the IMF meeting and the markets, anticipating this, have been "trading" up a storm. The result is that eight and a half months and $US 80 Billion worth of "work" by the BOJ has been smashed flat in one short week. The Yen has bolted upwards against the US Dollar.
Should this trend continue, then the question will have to be asked, WHO can take over from Japan to prop up the US Dollar? The list of answers is very short - the EU and/or, maybe, China/Hong Kong. Change the question to who would be WILLING to take over from Japan to prop up the US Dollar, and the answer becomes one word. NOBODY!
It has been a very well documented fact in the fall of the US Dollar which began at the beginning of 2002 that the Asian nations who depend on, or think that they depend on, the US for the export market which is the only underpinning of their own economic "growth", have been doing their utmost to PREVENT their currencies from rising against the US Dollar.
Then, of course, there is China and Hong Kong who have currencies which are pegged to the US Dollar and who are exhibiting no great urgency to change this arrangement. With the exception of Japan, Asia (most definitely including China/Hong Kong) has been rolling up gigantic rates of economic "growth" and huge stock market surges thus far this year as the ocean of Dollars and Treasury debt they have been absorbing is used as "reserves" for a renewed orgy of domestic lending. This is what led to the "Asian Crisis" of 1997-99. This is what will precipitate the NEXT "Asian Crisis", which could start at any time.
During the first Asian Crisis, the US, its Dollar and its markets waxed exceedingly fat as "hot money" from All over Asia and most of the rest of the world stormed into the US in the search for a "safe haven". That was then, this is now. One would be hard pressed to find a rational economic and financial observer who would consider the US as a "safe haven" in September 2003.
The dive of the Dollar against the Yen this week is a RED LIGHT WARNING! The fact that the US trade deficit has "only" blown out to the $US 500 Billion a year level is due in large part to the efforts of Asia, led by the Bank of Japan, to hold their currencies down against the Dollar. In the absence of the Bank of Japan, or should the Bank of Japan prove unable to hold the line, there is no other nation or group of nations in Asia which is willing AND able to take up the slack. Nor would the Europeans we willing to step in.
In the absence of this intervention, a "sharp drop" in the US Dollar is a stone gone CERTAINTY. Such a drop could slam the door on Asian exports to the US due to currency appreciation. That would almost instantly devastate Asian economies en masse. Or, such a US Dollar drop could simply lead to increased debt levels in the US, for a while, as US consumers struggle to "afford" the lifestyle to which they are unwilling to become unaccustomed. Whatever happens, the Dollar will tumble.
What a situation. For the second time in two weeks, Gold is on the threshhold of breaking through into a renewed upward run in its $US bull market. At the same time, after eight months of "throwing good money after bad", the Bank of Japan sees the Dollar crumble against the Yen. This weekend, the IMF is meeting, and that should be a REAL donnybrook - behind closed doors of course.
The 2003 low on the $US index is 92.25, a level set in mid June. Right now, the $US index stands at 95.34, mainly because its major component, the Euro with 57.6% of the index, has not regained its 2003 highs. This time, the Dollar is falling against the YEN. This is FAR more dangerous. Europe has NO interest in propping up the Dollar. Japan and Asia DO have an interest. If they can't do it, no one can or will.
In this situation, the chances of keeping Gold "in check" against the Dollar are as small as they have been in the past thirty plus years. Stay tuned, the rest of September could be VERY interesting.