For the second time in not much more than a month, Gold has stormed up to the $US 570 level, hesitated momentarily, and then swan dived back to the $US 540 level. The $US 570 level is thus established as serious resistance. As you can see, Gold has formed a double top there on the strategic $US 5 x 3 point and figure Gold chart. We don't know yet whether the $US 540 level which is now being tested will prove to be an equally decisive support point. In this regard, it should be pointed out that the London PM fix on March 10 was $US 535.00 and Gold's US intraday low on the spot future contract on the same day was $US 534.50. We do not yet have an established support point.
The most important similarity between Gold's two abrupt $US 30 swan dives from $US 570 to $US 540 since late January is that they have both taken place in lock step with the breaching of the US Treasury's debt ceiling. The first one took place in the lead up to the US Treasury's "debt subject to limit" hitting $US 8.173975 TRILLION - $US 25 million below the $US 8.184 TRILLION debt limit - on February 16. The official debt "subject to limit" has not changed by a single Dollar since February 16.
The most recent swan dive from $US 570 to 540 which has taken place this week, comes as the US Congress runs out of time to raise the debt ceiling. Treasury Secretary Snow has publicly stated that the Treasury will run out of the legal capacity to borrow in the week of March 20. On Friday, March 17, the Congress is due to rise for their Easter recess. While the House has sent a proposal for raising the debt ceiling to the Senate, the Senate has not yet acted on it. They have a week to do so.
As you have no doubt noticed, in the lead up to the Senate doing something about the debt ceiling, pretty well all the paper markets have been all but frozen. The Dow has been glued 100 points either side of the 11000 level for a month or so. The US Dollar is bouncing a point either side of the 90 level on the $US index. Treasury yields, after dipping into the inverted column for the best part of the last month, are almost completely flat. They are hovering just under the 4.75% level which the Fed Funds rate is expected to be boosted to when the FOMC meets again on March 28.
It is pretty well impossible to overstate the political and financial mess being faced by the Bush Administration right now. The February budget deficit just came in at a monumental record high of $US 119.2 Billion. By even the official estimates, Mr Bush's recent request for another $US 90 Billion or so for his Iraq/Afghanistan wars will take the total well above the $US 300 Billion mark - all this as we reach the third anniversary of the attack on Iraq and approach the third anniversary of Mr Bush's infamous "Mission Accomplished" statement on the Aircraft Carrier in May 2003.
The Iranian oil bourse is still scheduled to begin trading on March 20. It will be interesting to see if it actually takes place. And, of course, the Fed will stop "counting the money" when they discontinue M-3 reporting on March 23.
The official reason for the latest swoon in the Gold price is the anticipation of further US rate increases. This has intensified greatly recently with a ratcheting up of expectations that an END to Japan's five year plus "zero rate" policy is imminent. There are a few "minor problems" with this "analysis". If the rest of the world are about to join the Fed in ratcheting up interest rates (don't forget, Europe has barely started and Japan has yet to start), then the Fed will have to either go much further than the US economy can handle or abandon the Dollar by standing pat and watching the US "rate advantage" disappear. The problem here is that if there is concerted foreign suspicion (and there is) that the Fed is planning to abandon the Dollar, then the big foreign holders of Dollars could be tipped over the "selling point" at any time. That, if it occurs, would force up longer-term US interest rates despite ANYTHING the Fed could do.
Rising interest rates in a fiat currency world are ALWAYS indicators of a growing unease with the viability of the currencies themselves. No matter how much "spin" is put on this process and no matter how much concerted selling their might be on the futures markets for paper claims to metal, Gold (and Silver) ALWAYS stage their biggest upside moves in times of increasing rates. This is true on both a national and an international level. For the last international episode, look no further than the late 1970s.
Wall Street would have us believe that the prospect of the Fed continuing with rate hikes to levels which were seen as totally unsupportable not two months ago will be "good" for the Dollar because it will increase the return from owning Dollar denominated instruments. Sigh. It is bond market 101 stuff that interest rates and bond PRICES always go in opposite directions. It is stock market 101 stuff that higher rates and bull markets don't mix. Finally, it is economics 001 stuff that a borrowed to the hilt and beyond the hilt populace will stop consuming when they can no longer afford to service existing debt levels. The evidence that this is already happening in the US is everywhere, and it's not going to go away.
Despite all that, and for the moment, Gold has once again plummeted from the top to the bottom of what may be but is not yet proven to be a $US 540 - $US 570 trading range. Further weakness in the coming week will push Gold below the bottom of the range, and we will once more be looking for support point(s). It is telling, however, that after closing in London well below $US 540 and trading well below that level intraday in the US on March 10, spot future Gold regained the $US 540 level by the close.
As long as it can be, the pressure to hold UP the paper markets and hold DOWN the commodities and especially precious metals markets will be maintained. What choice do the financial powers that be have, other than issuing a gigantic "mea culpa" and slinking off into obscurity? People who have attained a position of great power and wealth under false pretences very seldom "go quietly".
We are not looking at an attack of mass gullibility here, or even at an attack of financial amnesia. We are watching a desperate rear guard action by the architects of the paper money system while their political counterparts, especially in the US, thrash around in ever decreasing circles trying to find a way out which simply isn't there. An economic recession of potentially grave proportions is absolutely guaranteed. A drastic overhaul or abandonment of the current global fiat currency system with the US Dollar as its "underpinnings" is equally guaranteed. The problem is the old historical problem. The most trying times in the demise of any fatally flawed political/financial system come when it approaches its death throes. The recent "perversity" of the Gold price is just one symptom of this.