Way back in late April 2002, $US Gold finally confirmed its bull market by breaking away from the $US 300 level which had constrained it for the previous four and a half years. Since Gold fell below $US 300 in November 1997 - for the first time in twelve years - it had repeatedly challenged that level and failed. It tried and failed in early 1998, in October 1999, in February 2000, in September 2001, and repeatedly in the period between early February and late April 2002. Finally, during the week of April 22-26, 2002, it broke away from the $US 300 level. It has not returned since. It will not return for a LONG time to come.
Now, a year and a half after that breakthrough in April 2002, Gold is nearing the $US 400 level for the third time since February 2003. Gold has breached the $US 390 level three times this year - in Asian trading in early February, in Comex trading in late September, and now once again in Comex trading in late October. As you can see from the data above, intraday Gold reached $US 394.00 on October 24 before falling back to set a new 2003 spot future closing high of $US 388.90.
The first thing to note about the period during which Gold languished under $US 300 is that the US Dollar was in a bull market throughout. In mid April 1995, the $US index stood just above the 80 level and Gold traded at $US 400. By late January 2002, the $US index stood at 120.5 (it had been slightly higher in July 2001) and gold traded at $US 275. Now, the $US stands at 91.51 and Gold trades at just below the $US 390 level.
Now it is a well known fact that one can do almost anything with "numbers", and looking merely at these numbers, it would seem that Gold is getting a bit ahead of itself at the moment. After all, when Gold was $US 400 in 1995, the $US index was languishing at 80. Now, with Gold knocking on the door of $US 400 again, the $US index is well above 80, it is 91.5.
To get a REAL handle on what is going on now as compared to what was going on then, we have to take a look behind the mere numbers to examine the attitude towards the US Dollar itself.
Over the entire period between 1995 and early 2002, when Gold was falling towards and then below the $US 300 level, the $US Dollar was on the upward rampage. For most of that period, up until the beginning of 2001, Fed interest rates remained stable. They were 6% in early 1995, they were 6% at the end of 2000. The Treasury trumpeted budget "surpluses" and predicted the ELIMINATION of Treasury debt by the second decade of the coming century. Every Treasury Secretary had only to repeat the mantra of the "strong Dollar policy". All was seen to be well. EVERYBODY wanted a piece of the US action.
Stock markets keeled over in early 2000, but the Dollar did not falter. US interest rates were decimated in 2001, the Dollar stopped going up, but it did not falter. September 11 took place, the Dollar faltered but quickly regained the lost ground.
The Dollar began to falter in early 2002 when it became clear that the Clinton message of paying off ALL Treasury debt was a pipe dream. The pressure grew at the end of 2002, when the Treasury started sending out strident demands that Congress raise their debt ceiling, an action which had not been taken for nearly five years, since mid 1997.
In early 2002, the Treasury debt ceiling was $US 5.95 TRILLION. It is now $US 7.38 TRILLION. Treasury debt, as of October 23, 2003 was $US 6.846 TRILLION.
For nearly 60 years, since Bretton Woods in 1944, the global attitude towards the US Dollar has (almost) always been one of complacency. With two brief exceptions, the period leading up to Nixon's closing of the Gold window in 1971 and the end of the "inflationary 1970s" in 1979, the solvency of the US and the safety of its currency has not been in question. For almost the entire period since the Dollar last came into "question" at the end of the 1970s, the preferred investment asset has been based on the US Dollar.
This holds true for $US Dollar denominated assets (stocks, bonds, and derivatives of all descriptions). It also holds true for non $US denominated assets. For every currency in the world - with the recent exception of the Euro - the bedrock or foundation underneath the system is the US Dollar.
What has happened in the year and a half since Gold finally regained levels above $US 300 to stay has been a gradual, and now accelerating, loss of complacency concerning the US Dollar. In a world which has been literally based on $US for nearly three generations, this is the most dangerous thing that could have overtaken the financial world.
This complacency received its biggest jolt yet when Sir John Templeton, the 92 year old doyen of global financial analysts, forecast a further 40% drop in the $US inside the next year. It has long become obvious to anyone who has been LOOKING AT the situation that the US is on a borrowing and spending spree which CANNOT be maintained.
The rest of the world, and especially Asia, is still buying new US debt paper almost as fast as it is being produced. They are not doing this because they anticipate any gains from their "investments". They are doing it because they fear the consequences of NOT doing it more than they fear the consequences of continuing.
In the context of the global financial situation, Gold has been "inching" up since it broke through $US 300 to stay eighteen months ago. Any hope that the Bush Administration would begin to take steps to address their budget shortfalls were snuffed out when the Iraq war began in March this year. Since then, there is no complacency left about the fate of the US Dollar. What remains is out and out FEAR.
The rest of the world is afraid of what will happen if they don't stop buying Dollars. They are afraid of what will happen if they DO stop buying them. Up until recently, the second fear was much more acute than the first.
For most of the period since Gold last stood at $US 400, there has been no fear at all attached to owning US Dollars, quite the contrary. The uneasiness only began in early 2002, and the fear began when the Bush Administration tossed all fiscal caution to the winds in early 2003. Now, six months after that, and for the third time this year, Gold is approaching the level where it rested at the start of the whole cycle in early 1995.
Gold has hit a new 2003 high. Intraday, it reached $US 394, $US 6 short of the $US 400 level. The worse the financial situation with the $US gets, the more desperate will be the efforts to keep Gold from breaking loose in $US terms. To keep Gold from breaking loose, the financial powers that be had better keep it below $US 400. Above that, the potential is huge for Gold to break free of restraint and REALLY take off.
Why? - because that is the point at which the fear of holding Dollars will overwhelm the fear of selling them. And the longer a sub $US 400 Gold price is maintained in current circumstances, the bigger the rush to sell Dollars will be once $US 400 is breached.