"Now, all we need to CONFIRM the bottom for the recent correction in the $US Gold price is a spot future close back above the $US 400 level."
The Gold Bull Market Last Week - June 18
Take a look at the daily spot future Gold chart above. Two items immediately jump to the fore. First, we have had two episodes in the past week of "gap up days" - Gold's $US 6.20 jump on Friday, June 18 and its $US 8.20 jump on Thursday, June 24. Second, with that $US $US 8.20 jump on June 24, Gold has closed back above its 200 day moving average for the first time since late April.
There is a third item too, but it isn't shown on the chart. It is the comparative movement of Gold and the $US index during the latest resurgence of Gold which began on June 14. Here is that record:
If you have been reading the daily commentary from the Gold dealers on the floor of the Comex over the past two weeks or so (a thankless task), you could be forgiven for getting the impression that Gold and the Dollar were joined at the hip and that a movement of one led inexorably to an exact "mirror image" move by the other. As the data above shows, that simply ain't so.
In fact, since June 14, Gold has been admirably fulfilling the FIRST pre-requisite for establishing the next leg of a genuine GLOBAL bull market. It has been moving up against ALL major currencies. Here's the record in regard to four of them:
As the US financial system lurches towards the "end of an era" with the first interest rate INCREASE by the Fed since May 2000 when the FOMC meets next Tuesday/Wednesday, Gold is doing precisely what it could be expected to do, it is anticipating higher US rates by going UP.
This is, of course, in sharp contradistinction to the predictions of the Comex Gold dealers alluded to above. They are unanimous in their outlook that higher interest rates will strengthen the US Dollar and the more aggressive the Fed is in lifting rates, the stronger the Dollar will become. Of course, according the the dealers, the flip side is that as the Dollar strengthens, the $US Gold price will weaken.
Indeed, this is so universally held a belief amongst the "mainstream" financial community that it might in fact happen, for a short while. This, of course, assumes that the Fed DOES raise rates when their FOMC meets on June 29/30. They'd better. A failure to raise rates at this meeting would be a stark admission that US indebtedness has reached the point where ANY rate rise could prove quickly fatal. Such an admission would NOT be conducive to the health of the currency, to put it mildly.
The Late June issue of The Privateer (publication date - June 27) points out that a Fed survey has reported that during the first quarter of 2004, total US borrowings climbed by an annualised (and seasonally adjusted) $US 2.733 TRILLION. Annual US GDP is about $US 11 TRILLION. In essence, the US is "borrowing into existence" amost exactly ONE QUARTER of its annual Gross Domestic Product. And as anyone living in the real world of the US (as opposed to Washington DC) will tell you, all that borrowing has been done in an economy which is, at best, standing still.
There is no way of knowing what MARKET rates of interest would be in such an economy. What we do know is that the US, like every other nation which numbers amongst its institutions a Central Bank, does NOT have market rates of interest. The Fed, for example, directly controls short-term rates and has a large influence, through its "liquidity injections" and other methods, on longer-term rates. The one thing of which we can be certain is that given the state of indebtedness of the US, if that nation DID have MARKET rates of interest, they would be manyfold higher, especially at the short end, than they presently are.
For four years, since the last Fed rate rise in mid 2000, the US has lived in a situation which combined fantastically high levels of borrowing with fantastically low levels of interest. Of course, the second was the major impetus for the first. The US, like all other "Central Banked" nations, has lived through many of these episodes in the past. But the one that will end next week is by far the most profligate, and distorted, such episode in US history.
This era (in modern financial markets, four years is more like an eternity) has blown, and deflated, a series of investment bubbles. These are, in order, the stock market bubble, the $US bubble, the bond market bubble, and the (not yet deflated) real estate bubble.
Remember the heady days of the late 1990s, when US stock market investors were blithely expecting annual returns on their portfolios of 18-20% in perpetuity? To a much greater extent, US borrowers have become used to expecting low interest rates in perpetuity. The accelerating indebtedness in the US private sector which has been a feature of at least the past decade shows this clearly. And, of course, as rates were hauled down savagely between early 2001 and mid 2003, the acceleration of debt rose almost exponentially and the US government joined in with a vengeance. The debt accumulation is still rising, even though almost everyone has been expecting a Fed rate rise at the end of June for at least a month now.
There are two aspects to the upcoming rate rise which are obvious. First, it will signal the end of this "era" of absurdly low interest rates and the beginning of a completely alien landscape where rates are anticipated to rise into the unknown future. Second, it will signal the beginning of a return to at least a semblance of financial reality for millions of grossly over-indebted people who have been living in what is almost literally a "dream world" for years.
But the REAL significance of this Fed rate rise, no matter its size, is the simple fact that the Fed can no longer maintain the fictions which it has been maintaining throughout the "era" of ever falling rates. The fact that the US economy still stands on a comparatively even keel despite the profligacy of the past four years is due almost wholly to the fact that the rest of the world continues to exchange its goods and services for the IOU's which are, in reality, US Dollars. The rest of the world has been willing to do this despite the VERY low returns they are receiving on their "investments". They are not willing to do this any longer, and the Fed knows it.
US interest rates at present levels contain NO component which compensates the holder of $US debt for a prospective fall in the purchasing power of the currency. Nor do US rates contain a component which compensates the holder of US debt for the possible future lessening or loss of the solvency of the issuer of US Dollars. Finally, US interest rates are NEGATIVE in real terms, and have been so almost throughout the four year "era" of ever lower rates.
This, by the nature of economic reality, is a situation which could not last. On June 29/30 comes the beginning of its end. Why does Gold ALWAYS go up against a currency whose interest rates are rising, especially at the end of an "era" when those rates have been held artificially low? Gold goes up because as the rates rise, they expose ever more starkly the distortions to the economy which were caused when they were falling. Gold goes up because it becomes more and more clear that the elimination (or at least lessening) of these distortions will inevitably cause severe economic and financial distress. And finally, Gold goes up because it is the only financial asset which is not exposed to this process. Why? Because it is the only financial asset which is NOT someone else's liability.
In a climate of higher interest rates combined with gross levels of debt, financial "liabilities" (read debts) are deadly dangerous, both on the borrowing AND the lending side. In such a situation, the lure of Gold waxes exceedingly, finally reaching a point where the financial authorities can no longer dam the flood, no matter what they try.
The coming rate rise is only the beginning of this process. The markets are primed for a knee jerk reaction in which the Dollar goes higher (and Gold maybe goes a little lower) in the short term. Even if that does happen, it won't last. If you don't remember the 1970s, you are heading into a whole new financial world. If you do remember them, think about what was necessary to lure the public back into US Dollars at the end of them. That's right, 20% plus SHORT-TERM interest rates.
Yes, it is a fact that long before rates reached even half the height they were at the end of the 1970s, the US debt mountain would collapse under the weight of servicing it. Everybody knows that. That adds even more to the lure of Gold. It is hardly surprising that the $US Gold price has been accelerating upward as the end of the "era" of ever lower US rates draws to a close.