One of the favorite "arguments" used by those desperate to deny the plain fact that the $US Gold price is in a nearly four year old bull market is the observation that Gold's rise is simply a reflection of the weakness of the US Dollar against other major world currencies, notably the Euro.
The raw numbers tend to support this argument, up to a point. They tend to support it even more since the last bout of US Dollar weakness began with Mr Kerry's concession of the Presidential election on November 3. Consider the following data:
As you can see, the further back you go in $US Gold's bull market, the more the increase in $US Gold has outsripped the fall in the $US index. Gold's big bull market moves took place in 2002 and 2003. In 2002, $US Gold gained 24.80%. In 2003, $US Gold gained 19.50%. So far this year, Gold has gained a mere 7.98%. As recently as October 18, not much more than a month ago, $US Gold had not gained at all on its level at the start of 2004.
The argument that the $US Gold price rise is simply a mirror effect of the weaker US Dollar has gained credence this year for a number of reasons. First, it has only been this year, and in many cases only over the three weeks since the election, when many US pundits have been willing to acknoweledge that the $US was in a bear market. Second, while Gold has been setting new 16 year highs in $US terms for the past two weeks, it is still languishing below its much more recent highs against other major currencies, notably the Euro, the Yen, and the "commodity currencies" like the $A, the $C, and the SA Rand. The attitude is that once the present "weakness" of the $US is resolved, then Gold will go back into the well-deserved obscurity from which it has so recently emerged.
Such is the power of wishful thinking, especially when one's financial future is at stake, that an amazing number of so-called "market professionals", even many plying their trade outside the US, are still avidly deluding themselves to the effect that the new Bush Administration will indeed prove to be omnipotent. The US government has laid out a "policy" for their second term which blithely assumes that they can go on spending ever increasing amounts of borrowed money with no negative implications whatsoever. They also blithely assume that the "reputation" of both their currency and their debt paper is such that the rest of the world will continue to fall all over themselves providing the REAL wealth necessary for the US government's plans to continue to come to fruition.
For years, warnings that this is simply impossible have been flowing from this website and from knowledgeable and competent analysts all over the internet. All of them were utterly ignored during the recent US election campaign. Neither candidate addressed them at all. Since the election, the warnings have flowed from financial officials and Central Bankers all over the world. Last week, even Alan Greenspan entered the fray with his warning that "...international investors will eventually adjust their accumulation of Dollar assets.".
Astonishingly, the G-20 meeting of Finance Ministers and Central Bankers which took place in Berlin, Germany over the weekend of November 19-21 ended with a communique which made almost no mention of currencies whatsoever. Yet the Japanese stopped trying to keep the Yen down by using it to buy Dollars way back in March. And China, which stepped into the breach when the Japanese stopped, have recently made loud noises about "diversifying" their foreign exchange holdings. The proverbial writing is on the wall in letters of bill poster size, yet remarkably few people are thus far willing to read it.
This week, Gold seemed to slow down in $US terms, aided of course by the fact that it did not trade in New York on either Thursday or Friday. The London AM and PM fixes were above the $US 450 level on both days, and London Gold traded as high as $US 455 early on the November 26 session, but officially, the $US spot future Gold price remains where it was at the close on Wednesday, November 24 - at $US 449.30.
Almost certainly yes - at some point. Barring a panic flight out of US Dollars, a scenario which cannot be ruled out, the $US index will stage a rally somewhere between its present level of 81.81 and the bottom of its previous bear market - about 80.00 set in early 1995. There is a big short overhang amongst currency traders and at some point, the temptation to take profits will become too big to resist. The closer the $US index gets to that previous 1995 bear market low, the bigger the temptation will become.
Most rallies in modern paper markets begin as short-covering rallies as the captive buyers which are the shorts buy back to take profits. Once this buying has run its course, the duration and magnitude of the rally depends on how many new buyers the initial run up caused by the short covering can attract. There is a BIG difference, however, between a bull market and a bear market in this respect.
In a bull market, corrections attract shorts and the correction often ends when the shorts take profits. This attracts new buying and because the market is in a bull phase, the new buying propels it above its previous highs. The perfect example of this is the numerous episodes of buying on weakness which characterised the US bull market of 1995-2000.
In a bear market, shorts are much more confident, knowing that they are betting WITH the trend instead of against it. They are therefore more tenacious, only selling when the market gets near previous landmarks - like the previous $US index bear market low discussed above. Having sold, the shorts are looking for the first opportunity to short again, knowing that the trend is with them.
At the point where the shorts take profits, the $US index will rally. Once the shorts have taken their profits, any continuation of the rally will depend on attracting new buyers. Any new buyers will know that they are betting AGAINST the trend. At the point where new buyers peter out and the rally falters, the shorts pile back in and the exit of the longs gathers steam. The rally ends.
The points to make here are simple. Any rally in the $US index will not change in any shape or form the fundamental situation regarding the US Dollar. As long as the Bush Administration does NOT address the US current account, trade, and budget deficits, as long as the US keeps pretending it can live beyond its means with no ill effects, the fundamental situation will not change. There have been no indications that the Bush Administration has any plans to address any of these issues. As long as that remains the case, any $US index rally will simply be a "hiatus" in the ongoing bear market.
The REAL "balance" between the US Dollar and Gold is one of perception. For almost a quarter of a century, ever since Gold fell off its early 1980 peaks, the US Dollar has reigned supreme in the eyes of the world as the global medium of exchange. Up until VERY recently - we would say right up until the recent Presidential election - the vast majority of people saw any suggestion that the US Dollar was a potentially fatally flawed medium of exchage as being laughable. Very slowly, that attitude is changing, a phenomenon which has not been seen on global financial radar screens since that brief period at the end of the 1970s. Many Americans would acknoweldge that Gold is in a bull market. Most people in the rest of the world would not acknowledge it, simply because Gold has languished in terms of currencies not tied to the $US for most of this year and continues to do so.
As we have pointed out in recent commentaries, in both 2002 and 2003, Gold made about half of its annual gain in the last six/eight weeks of the year in $US terms. In the latter part of this move, in December 2002 and 2003, Gold was rising, not just in terms of $US, but in terms of ALL currencies. The situation is certainly ripe for Gold to do the same thing this year - even if the $US index does rally in the meantime. Gold is certainly looked upon as an attractive investment by many more people now than it was at this time in 2002 or 2003. The fiscal and financial state of the US is worse now than it was then, and much more important, many more people KNOW it. It is eminently possible that a $US rally, coupled with either flat or gently falling $US Gold prices, would trigger more overseas Gold buying if and when Gold exceeded old highs in terms of overseas currencies. If Gold did NOT fall in the face of a $US rally, then the potential is there for an avalanche of new buying.
We cannot be certain of what will in fact happen. We can merely be certain that Gold IS in a bull market - as was re-confirmed when it broke above the $US 440 level on November 16. We can also be certain that whenever the $US index does rally, and whatever the extent of the rally, the fiscal and financial situation of the US will NOT change as long as government policy remains as it is now. The US government is skating on the thin edge of its currency losing not only its reserve currency status, but its status as a comparatively viable currency at all. Gold stands patiently waiting in the wings. That's the present "balance" between the US Dollar and Gold.