Yep, this is the same headline that we used last week, with a difference. The G-10 meeting in Switzerland and Mr Bush's State of the Union address are now history. We await the FOMC meeting on January 27-28 and the G-7 meeting in Florida on February 7.
Two down, two to go. The G-10 meeting in Basel Switzerland began the hopeful rumours circulating, as the heads of both the European Central Bank and the Bank of Japan went on record as stating that "excessive" exchange rate movements were "unwelcome". Why did this these totally innocuous comments start the rumours flying? Well, everyone knows that Japan finds the exchange rate movements (read falling $US) "unwelcome". They have been spending countless TRILLION Yen for more than a year now to try to contain them as best they can. With the ECB head now chiming in, could Europe be contemplating joining in?
In this context, cast your mind back to the previous G-7 meeting, which took place over the weekend of September 20-21, 2003 in Dubai. The "highlight" of the communique which was the result of that meeting was the contention that the nations involved favoured "flexible exchange rates". They also piously agreed that the various Central Banks should NOT intervene but should let the "markets" take care of things.
This was fairly "rich" considering the track record of the Bank of Japan for the nine months leading up to that G-7 meeting. Nonetheless, the interpretation then was that Japan was on its own. The Dollar kept falling, Gold broke through $US 400, and the Bank of Japan kept spending more TRILLIONS of Yen to buy Dollars to try to insulate Japan's export market from the falling Dollar.
By the beginning of this year, with the Dollar slide accelerating, global financial analysts attained virtual unanimity that it was time for the world's Central Banks to get together and DO SOMETHING! Then came the first break at the G-10 meeting when the rumours started that Europe might join with Japan to intervene. Interestingly, no mention of any role that the Fed might play. Accordingly, a few days after the G-10 meeting finished, the $US index staged a big upward turnaround and Gold suddenly slid almost $US 14.00 in one day.
Mr Bush's State of the Union Address on January 20 was remarkably inconsequential. The next speech given by an Administration heavyweight, Vice President Cheney's address to the Davos Economic conference on January 24, might have more meat on its bones. Mr Bush did the obligatory "we're beating the terrorists" shuffle but confined most of his remarks to the state of the US economy. There was money for "education", money for health care and health "insurance", money against drugs, a promise that the new budget, to be delivered to Congress in two weeks, won't increase discretionary spending by "more than 4%", and a claim that the budget deficit would be halved in five years. No really "big ticket" items were mentioned.
There was next to no immediate reaction to Mr Bush's speech on the markets. That came by the end of the week when stock markets took a minor downturn, bond markets cratered with medium and longer-term yields up alarmingly, and the Dollar staged yet another rebound.
The Dollar rebound came strictly on the strength of rumours that the Europeans might be getting ready to play the currency intervention game. To the rumours of intervention on the markets was added new rumours that the ECB might be ready to cut rates. The next time the ECB has the chance to move their rates is on Thursday, January 29 - the day after the FOMC announces its decision on rates on January 28. No one, anywhere, expects the FOMC to do anything but stand pat on the present 1.00% Fed Funds Rate.
One other item, in the midst of all this. On January 18, it was reported that European Central Banks were "likely" to renew their five year agreement (known as the "Washington Agreement") to restrict annual Gold sales by the 15 participating Central Banks. The agreement does not expire until this September. The change with the new agreement is that the amount of Gold permitted to be sold in annual aggregate is said to be rising to 450 tonnes from its previous 400 tonnes. Combined, the 15 EU Central Banks presently hold about 14,000 tonnes. The US is reported to hold 8192 tonnes - a figure which has not officially changed since the late 1960s.
Everything is gearing up towards the G-7 meeting. Large bets are being made that the Central Bankers there will finally bite the bullet, get together, and DO SOMETHING about US Dollar weakness. We think that perhaps the commentators have been watching too many "Lord Of The Rings" movies recently. In the movies, a little old man with a pointy hat, a long beard, and a magic staff can do amazing things simply by wishing it so. It doesn't work like that in "real life".
And so, Gold is correcting against every currency including the US Dollar - for the first time since just after the last G-7 meeting in September 2003. That correction took three weeks to complete itself. It actually took $US Gold six weeks to decisively breach the level it had reached before the correction. After that, it was on to $US 400, on to the top of the previous (1996) bull market, and then ABOVE the top of the previous bull market.
Over the past three months, $US Gold has broken through ALL its remaining resistance points. It took until November 2003 to decisively breach the 2003 highs set the previous February. In December, Gold cracked $US 400. In January, it decisively cracked through the February 1996 top ($US 414.70) of its previous bull market, reaching a closing high of $US 426.80 and an intraday high above $US 431. This, breaking above the top of a previous Gold bull market, had not been achieved by Gold since July 1978.
Now, Gold is back below its 1996 high, but the damage has been done. Gold may go lower, it may go back below $US 400. There is a LOT at stake in the days leading up to, and following, this G-7 meeting on February 7. We repeat, during the last correction, it took Gold six weeks to wipe out and then decisively break above its previous highs. That was the shortest-lived correction since Gold broke back above $US 300 to stay in March 2002. Let's see how long it takes this time.