The only thing we didn't know was where it would correct and how fast it would correct. We know now - from $US 721 (as of the close on May 11) and pretty damn fast (as in $US 54.30 or about 7.6% for the week). In essence, what Gold has done since last Friday is to give back almost (but not quite) all of the gains it made in May up to its high on May 11.
Volatile it certainly was. The week began with the spot future price cratering $US 26.70 on Monday, May 15. To get an idea on why that might have happened, check out this May 14 story in the UK Guardian online newspaper- IMF acts to avoid markets meltdown. The biggest "imbalance" in the global economy over the past two months or so has been the soaring Gold price.
But until the Fed met on May 10 and raised US rates by yet another 0.25%, this "imbalance", along with many others, have been remarkably successfully ignored by the global mainstream financial press. That became harder to do this week. What had been the main "concern", the falling US Dollar, was not a concern this week as the $US index stabilised above the 83.83 52-week low it set last Friday (May 12). This week, the main concern has been swooning global stock markets. To take a look at the damage which has been done, here are charts of the Dow, the S&P 500, and the Nasdaq. There are similar formations on the charts of all the major global stock market indexes - here's the Australian All Ordinaries index to give one example.
With all this going on, coupled with the fact that the best one can say about the US Dollar was that it stopped going down this week, there has been remarkably little notice taken of Gold by the mainstream press. There has certainly not been much in the way of "I told you so" being trotted out.
Their attention was elsewhere. This was especially true on Wednesday, May 17 when a jump of 0.9% in US wholesale goods prices for April was reported. Some of the "core intermediate goods" price rises were even more harrowing. Year on year, overall "core intermediate goods" prices rose 4.9%. "Core crude goods" prices rose 16.1%. Gasoline prices in the US rose 12.3%.
The reaction by Gold to this news was instantaneous. By late Asian trading on May 17, Gold was up to $US 717 (only $US 4 below its May 11 high). The spot future contract on the Comex opened at $US 708 on May 17 (up $US 15 from the previous day's close) and got as high as $US 712.50 as an intraday high before giving all those gains back by the close of trade. An even more telling example of the volatility came in the London Gold fix. The May 16 AM fix was $US 681.00. The May 17 AM fix was $US 713 - $US 32 higher! Then on May 18, the London AM fix was back down to $US 688 - $US 25 lower!! Things got pretty wild and wooly this week in the commodities and precious metals markets.
But the great majority of people weren't looking over there. They were looking at their stock market and at their Central Bank. The official (non "core") US April CPI figure of 0.6% which came out on May 18 set off an cacophony in the mainstream financial press, all of it having to do with grave fears that the Fed might have no choice but to go on raising official US rates. Up until the latest FOMC meeting on May 10, there was great and burgeoning hope that the Fed was ready to stop - at least for a while. That's what got the Dow, for example, to within 1% of its all time high on May 10 - the day of the FOMC meeting. Since then, the index is down 500 points (4.3%). Other US (and world) market indexes have fared far worse.
Everybody knows about the US trade and current account deficits. Everybody knows about the US budget deficits. Everybody knows about the insoluble crisis about to hit US "entitlement programs" as the baby boomers retire. Everybody knows that the US Dollar has not already crashed in ruins only because it is still being accepted in exchange for real goods by exporters to the US, notably the Asian nations. Take a look at the year on year rise in "core intermediate goods" prices given above. Annualise the 0.6% in the US CPI for April. These numbers are as optimistic as the fine art of government statisticians can make them, and they STILL equal or exceed the current official US Fed Funds rate of 5.0%. In REAL terms, US interest rates are still NEGATIVE.
There is no ECONOMIC incentive for anyone to hold the US Dollar, the rate of return one can get on $US denominated instruments does NOT compensate the holder for the loss of its purchasing power. POLITICAL incentives there certainly are, lots of them. A wholesale dump of the US Dollar by its foreign holders would lead to instant economic and financial upheaval EVERYWHERE. That would in turn instantly result in a huge political backlash against those in power - those who told their people that such upheavals were impossible.
As we have pointed out in these pages several times this year, once Gold broke above the $US 300-500 trading range which confined it for almost all of the long period between the beginning of 1981 and the end of 2005, there were only two major resistance points left. The first was at or about the $US 710-715 level. This was the highest level Gold reached in September 1980 in its rally from the correction which immediately followed its January 1980 $US 850 all time high. The second was, and remains, that $Us 850 all time high.
Gold has hit the first of those resistance points, and rebounded off it. This week, the bigger the price inflation numbers which were reported, the bigger the Gold (and Silver) selloff in reaction to it. That is the way the financial world works, and it has worked that way for a long time - as that quarter of a century of Gold between $US 300 and $US 500 illustrates so well.
Recently, President Bush gave a speech on "immigration" to the US. In it, he said this: "We have enough (National) Guard forces to win the war on terror, to respond to natural disasters, and to help secure our borders". It is a cruel joke that any speechwriter would put such words in his mouth and a crueller one that he can continue to get away with it. The political and economic situation in the US is in extremis. Mr Bush can say that he can stretch an overworked and undermanned National Guard from Brownsville in Texas to San Diego in California and solve all problems. Mr Bush can say that the nation he leads can go on borrowing and printing money while sneering at creditors abroad and dependents at home and no problems will arise. He can say it, but that doesn't make it true.
The desperation is written all over the amazingly fatuous remarks of US political leaders. It is written all over the mainstream press as they keep on repeating that just because everything looks bad doesn't mean it IS bad. Gold just hit the second last major resistance level on its way to its January 1980 high. It got resisted, but good. As in all of the previous corrections in this bull market, the first step is to find the support level. We don't think it will take too long to do that.