Before reading this commentary, please re-read our commentary for September 9, 2005 titled: "A Long Time Between Drinks"
That was written as Gold reached the $US 450 level for the first time this year and the week before the spot future Comex Gold price finally managed to close above its previous bull market high ($US 456) which had been set more than nine months previously in early December 2004.
In the commentary, we pointed to the fact that once Gold managed to surpass its December 2004 highs, it would be on its way towards the top of a gigantic trading range ($US 300 to just above $US 500) in which it had been trading ever since the dawn of the financial asset inflation age in 1982.
August 1982 is famous in financial circles as being the dawn of the great stock bull market which lasted - with some pretty spectacular dives along the way - for eighteen years. In August 1982, the Dow bottomed at 776 and began the long journey to its blow-off highs around the 11725 level in January 2000.
What the summer of 1982 is not famous for is that it was the low point reached by Gold in its fall from its $US 850 all time high set in January 1980. At the end of 1982, about six weeks before the Dow bottomed, spot future Gold penetrated just below the $US 300 level, bottoming at $US 296. From there, Gold and the US stock markets took off in unison. From its low just below $US 300 in June 1982, Gold soared (just) above $US 500 in just seven months, reaching that level by mid January 1983. At that time, the Dow had risen from its 776 lows to just under the 1100 level.
Here is the massive difference since then. The $US 511 spot future close for Gold set in January 1983 has not been surpassed to this day. At its high point of 11723 in January 2000, the Dow was 975% above the levels it reached in January 1983. At its present level of 10766, the Dow is still almost 890% above its January 1983 highs.
There have been no restraints on "money" creation whatsoever since August 1971. When "money" is created, either via the banking system or crudely via the printing press, it has to go somewhere. In the 1970s, the new "money" went into economic goods and precious metals and Gold soared from $US 35 to $US 850. But from the early 1980s to date, the money has gone into financial paper assets. The Dow rose from 776 to 11723 by the beginning of 2000 and is still within 1000 points of that level nearly six years later.
The item which has been the ever-accelerating constant since 1971 has been the inflation. The item which has changed has been the destination for the ever enlarging supply of "money" created by the inflation.
In the era of paper asset inflation which began in August 1982, Gold had about seven months in the sun. Between late June 1982 and late January 1983, Gold soared from $US 296 to $US 511. Almost a quarter of a century later, that six month spurt still defines almost all of the trading range which Gold has been in since early 1981 - and is still in today.
Yes, Gold did fall into the $US 250s in 1999 and again in early 2001, but these levels define the bottom from which the present Gold bull market has sprung. And now, more than six years after Gold's 1999 bottom and nearly five years after the 2001 bottom, Gold is nearing the top of its "paper asset inflation" trading range - February 1981 to November 2005, and counting. Yes, it has taken a long time to get there, and yes it is not there yet. But neither the length of time taken nor the fact that Gold is still in its trading range should surprise anyone given the gigantic vested interest which has kept it in there for so long.
The last two weeks, during which Gold has risen $US 28.30, have been the best of 2005 and amongst the best in the post 2001 Gold bull market. This is especially true in non $US currencies because the US Dollar has not fallen at all during this huge Gold price spurt. Remember, right up until the end of last year, the $US had been falling throughout almost all of the Gold bull market. 2005, and especially the past two months of 2005, has been a period during which Gold was rising despite a flat or rising US Dollar, not because of a falling US Dollar. This has shifted the perception of Gold hugely in the rest of the world, if not yet to any marked degree inside the US
We are now right in the best seasonal time of the year for Gold as established in the previous years of the present bull market. Gold had BIG upside moves in the last two months of 2003 and 2004 - aided and abetted it must be added by almost equally big falls in the US Dollar. This year, November is panning out just it did in 2003 and 2004 for Gold, but the Dollar is NOT falling - not yet anyway.
The last time Gold closed below $US 300 was April 9, 2002. The last time Gold closed below $US 400 was September 9, 2004. We don't know when Gold will trade above $US 500. What we DO know is that when (not if) it does, it will be challenging the TOP of a Gold trading range which has been almost a quarter century in the making. That range, which began in August 1982, has seen by far the greatest inflationary surge in the history of the world - a surge which dwarfs the so called "inflationary 1970s", the decade in which the "price" of Gold increased more than twenty-fold.
One signpost of things to come is the recent announcement by the Fed that they are to discontinue their publishing of the M3 money supply numbers next March. This monetary statistic measures "broad money". As such, it is the measure which most closely reveals both the real amount of inflation in the system but the speed at which it is increasing. Inflation is an increase in the TOTAL STOCK OF MONEY. M3 or "broad money" is the statistic which comes closest to "measuring" this increase.
We analyse this decision by the Fed in the Late November (#540) issue of The Privateer - published on November 20. If we had to point to a signal of the END of the era of money creation going into financial assets instead of economic GOODS, it would be March 23, 2006, the day when the Fed ceases publishing its "monetary aggregate".
The other signal, whether it comes before or after March 23, 2006, would be a $US Gold price which rises above the $US 510 top of its post 1981 trading range. We're close, but we're not there yet. We will be fascinated to see which one comes first.