Last week, we were wondering whether Gold had entered a trading range or if the correction had not bottomed out. Here's what we had to say:
"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."
As you can see from the $US 5 x 3 point and figure chart - link above - we still can't be entirely sure because Gold hasn't yet turned up on the chart. To do that, the spot future price is going to have to close at $US 560 or higher. However, this week we have had an abrupt transition from the bottom of the range to right in the middle of it, followed by the last three trading days in which the spot future Gold price has traded right all around the midpoint of the range at the $US 555 level.
The most important potential factor that may act to push Gold back up to and possibly above the top of this range in the near future is the recent weakening of the US Dollar. The spot future close on the $US index broke above the 90 level on February 6 and, with the exception of three trading days at the beginning of March, stayed above that level until March 15. Then it fell out of bed. Over the last three trading days of this week (March 15-17), the $US index spot future close has plummeted 2.26 points (or 2.5%) to 88.53. That's its lowest level since January 26.
Some would say it's about time. This week, the US government announced that the budget deficit for the short month of February was a gargantuan $US 119.2 Billion. They also announced a January trade deficit of a record $US 68.5 Billion. Then there was the US current account deficit for 2005 which came in at $US 804.9 Billion. Finally, it was announced that as of the end of 2005, foreigners hold a total of $US 11.154 TRILLION in US financial paper assets. That is almost identical with annual US GDP.
But the financial profligacy doesn't stop there. On March 16, the US Senate signed on for a $US 781 Billion increase in the Treasury's "debt limit", boosting it to just below the $US 9 TRILLION level at $US 8.965 TRILLION. Mere hours after that chore had been completed, the Senate wielded a giant rubber stamp and approved the Bush Administration's $US 2.77 TRILLION budget for fiscal 2007 - the year starting on October 1, 2006.
Please note this carefully. In the four and a half months between October 1, 2005 and February 16, 2006, the Treasury's official funded "debt to the penny" grew by $US 338 Billion. We do not know how much it has grown since February 16 because the numbers have been frozen pending the debt limit increase. We DO know that the budget deficit for February alone was almost $US 120 Billion! We know that debt levels are accelerating at every level of the US economy, public and private. It is conceivable at the current rate of increase that the Bush Administration might go down in history as the first to hit the Treasury's debt ceiling twice in one year.
The last debt limit increase - a rise of $US 800 Billion - was on November 19, 2004. It lasted just under fourteen months - Treasury debt levels were frozen on February 16, 2006. This one is slightly smaller at $US 781 Billion. On the pace of borrowing since the last limit increase, this one should allow the Treasury to borrow until early next year. But the RATE of Treasury borrowing has been inexorably increasing. It may well be a close run thing.
Treasury bond yields are now about as low as they can go, unless Mr Bernanke suffers an attack of terminal panic and starts LOWERING official US rates again. The Fed Funds rate is presently 4.50%. The thirty-year Treasury bond yield was 4.72% on March 17. Universal expectations are for the Fed to add yet another 0.25% to the Fed Funds rate - bringing it to 4.75% - when the FOMC meets on March 28.
The Fed has two problems. The first is that in any REAL terms, the Fed Funds rate and the entire Treasury yield curve are still in NEGATIVE territory by a substantial margin. The official CPI and PPI numbers are a farce. REAL price increases in the US are advancing at somewhere between 8-11% annually.
The second problem facing the Fed, which we covered in the Early March Issue (#547) of The Privateer, is that the rest of the world is only now STARTING to raise their interest rates. The global foundation of the carry trade, Japan with their long standing "zero rate" policy, has not yet started. Foreign Central Bankers are just as alarmed at the borrowing going on in their nations as the Fed is, but they have not been able to afford to raise their own rates for fear of pushing the US over the brink of recession and facing the certainty that such a recession would rebound in their own economies.
It is only now, after the Fed has been steadily raising rates (albeit in baby 0.25% steps) for nearly two years that the rest of the world has BEGUN to take steps to try to bring their own credit expansions under some kind of control. When the Japanese join in, and they are threatening to do so with increasing regularity, we will be seeing the BEGINNING of global rate rises, not the end that Wall Street is hoping for.
The US problem is simple, of course. The Fed can't afford to go on raising rates because to do so would dry up consumer spending and crash the US economy. They cannot afford NOT to go on raising rates, especially if the rest of the world is doing so, because doing that would pull the rug out from under the US Dollar. And a falling US Dollar would raise the spectre of foreign selling of US financial assets. Remember - see above - the rest of the world already own more than $US 11 TRILLION of US paper financial assets - an amount equivalent to the entire official output of the US economy for one full year.
As you can see, the case for Gold breaking out of its current trading range is not hard to make. One could throw in the quagmire in Iraq and a potentially much bigger potential quagmire in Iran just to "sweeten" the pot. The fact remains, of course, that neither the Fed nor any other Central Bank nor any government political or financial potentate anywhere wants to see a soaring Gold price. We can be confident that the current trading range will be maintained as long as possible.
What we have right now is a resistance point at or slightly above the $US 570 level and a support point at or slightly below the $US 540 level. Economic reality says that the range should be broken through to the upside in the VERY near future. Political financial necessity says that Gold must be held inside the range if it can't be forced below the range. That's been the usual state of affairs in each "pause" in the Gold bull market for the past four years. We should all be used to it by now.