2005, the year just ended, has been a SIGNAL year for Gold. Too see why, take a look at the table below. It shows the annual performance of Gold in terms of four major global currencies plus the $US index since the beginning of the $US Gold bull in 2001:
When reflecting on Gold in 2005 (or in any other year), most people content themselves with looking at its "price" expressed in US Dollars. You can see that in the left hand column right after the year column. Nothing particularly eye-opening about Gold's performance against the US Dollar this year, is there? Yes, it had a good year, gaining 18.36%. But 2002 and 2003 were better years, during which Gold gained 24.80% and 19.50% respectively against the US Dollar.
But take a wider look at the table and the picture changes dramatically. Look at the performance of the $US index in 2002 and 2003 (and for that matter 2004). Big losses each year, right? Now take a look at 2005. WHAT A CONTRAST! Gold gained 18.36% in 2005 - AGAINST A US DOLLAR (as measured by the $US index) WHICH WAS UP substantially on the year.
Now take in the whole table, including Gold's annual performance against the Aussie Dollar, the Euro, and the Yen. Look in particular at Gold's performance against these three currencies over the two years preceding this one - 2003 and 2004. Against the $A, Gold fell substantially. Against the Euro, it fell a little. Against the Yen, Gold rose, but only a little.
There was certainly minimal encouragement to buy Gold as an investment (as opposed to financial INSURANCE) for people using these currencies (and many others) over 2003-2004.
HOW THAT HAS CHANGED IN 2005! Gold has risen dramatically against the $A this year and it has literally soared against the Yen and the Euro. In both Europe and Australia, Gold's performance handily outpaced the gains in their respective stock markets. In Japan, thanks to its biggest annual rise for 20 years, the stock market beat Gold, but only by a little. One thing is certain. Gold's performance in all these currencies drastically wiped the floor with the returns which could have been gained on US markets this year.
2005 has been a breakout year for Gold in many respects. It rose substantially against a rising US Dollar. Even more important, after two years of going nowhere, Gold exploded upwards in terms of major non-US currencies this year. For the first time since 2002, the first year of Gold's $US bull market, it has been a major INVESTMENT success this year all over the world. And OUTSIDE the US, the local currency Gold gains in 2005 are a multiple of what they were in 2002. 2005 was the year when Gold's strength was NOT a mere mirror of the US Dollar's weakness on world markets.
All of the above is equally the case (actually even more the case) for Silver.
Coinciding with this development has come another of potentially even greater significance. For almost the entire month of December, Gold has been trading ABOVE the $US 500 level. The $US 500 level is the TOP of an immense trading range which has confined Gold for most of the past 24 years. Since the metal was coming off its January 1980 $US 850 highs in early 1981, Gold has only traded above the $US 500 level on a spot future closing basis on eleven trading days in January/February 1983. Its highest spot future close over that period was $US 510 on January 31, 1983. In December 2005, Gold has reached levels substantially above that twice. It hit a bull market high of $US 528.40 on December 12. And, after a correction which saw it briefly dip back below $US 500, it has now climbed back to $US 518.90 on the last trading day of the year.
Will Gold keep going up in terms of the US Dollar and the other currencies (paper one and all) in the new year? Most assuredly it will. The only question is how long the present impasse under recent highs holds out. Last year, it took nine months to break through a December high. We don't think it will take anything like that long in 2006.
At the end of January, Alan Greenspan's eighteen and a half year residency as the head of the Fed comes to an end. Mr Bernanke is his anointed successor, needing only what should be a routine confirmation from Congress after they return from their holiday break. It is NOT a coincidence that Gold's big upmove this year started on the day that President Bush confirmed Mr Bernanke as his choice to succeed Mr Greenspan. Mr Greenspan was a renegade priest at the alter of interventionism and credit expansion. Mr Bernanke is an acolyte, a TRUE believer, ready, willing and able to perform any financial atrocity to keep the faith.
On December 29, US Treasurer Snow let slip the obvious, informing Congress that the Treasury would run out of borrowing room under the present debt ceiling by February and "urging" them to get busy and raise the present $US 8.184 TRILLION limit. The Bush Administration raised the ceiling annually in 2002-04 and only just missed having to do so again in 2005. On their present trajectory, it is not expected that Congress will get around to a new ceiling until March, having a lot on their plates when they return from their recess . The US debt ceiling has already been raised by $US 2.4 TRILLION since 2002. It's a safe bet that the next debt ceiling rise - IF IT OCCURS - will see the ceiling raised by more than $US 3 TRILLION in less than four years.
We say "if it occurs" because the last two debt ceiling raises have been accompanied by wide discussion as to whether the debt limit should be done away with altogether. Considering the fact that a "debt limit" (of $US 11.5 Billion) was first imposed by Congress in 1917, it has been the sick joke of world finance for many decades now. Please note that it is not expected that the Congress will decide on any new limit until March. As you probably know, March is also the month when the Fed ceases to report on US M-3 (broad money) numbers. There will undoubtedly be a temptation to do away the debt limit at the same time.
Within three months, the US and the world's financial system faces the prospect of the most inflation oriented Fed Chairman in history and the end of any statistical constraints whatsoever on his ability to inflate without telling anyone about it. Couple that with a lame duck Presidency with three more years to run and the growing and real prospect of impeachment for Mr Bush and Mr Cheney. We'd say that the prospects for Gold in the year to come are not too bad. What do you think?
As this is being uploaded, there are just under eight hours left in 2005 down here in eastern Australia. To you and yours from all here - A VERY HAPPY NEW YEAR!!
