As you know, the spot future Gold price has surged more than $US 20 this week, most of the rise coming on February 8 and 9 when Gold approached the $US 660 level. At its closing level of $US 667.50 on February 9, spot future Gold has hit its highest close since July 14, 2006. That close was $US 668 and marked the top of Gold's rebound from the savage sell off of late May early June 2006 which saw the spot future Gold price plummet from $US 721.50 to 562.30 in just over a month.
That was the biggest correction so far in the Gold bull market which stretches back to February 2001 when Gold closed at $US 255, marginally above the $US 253 level it had reached in August 1999. And ever since that big sell-off last year, every dip in the Gold price has brought forward a new chorus. That's it! The bull market is over! Gold's going down from here!.
Most of this has come from the mainstream financial press, and from "analysts" who don't know, or don't want to know, why Gold emerged from a twenty-year slumber in 2002. These people have bought what has been drummed into everyone's heads for the past 75 years. They have bought the line that Gold is a "barbarous relic". They have bought the Central Bank line that an "elastic currency" is necessary to meet the needs of business. They have bought the line that debt doesn't matter, and that "money" based on debt is "sound", because "we owe it to ourselves".
At the end of June 2006, about six weeks after Gold plummeted from the $US 720 plus levels it had reached in mid May, the US Fed stopped raising official US interest rates. Over the previous two years, they had raised rates in seventeen consecutive 0.25 percent stages from 1.00 percent to 5.25 percent. This was the most predictable, and telegraphed in advance, series of rate rises in Fed history.
Before that, in 2001 alone, the Fed had lowered official US interest rates from 6.50 percent to 1.75 percent. That was done to rescue the US financial system from the bursting of the US stock market bubble which was THE financial feature of the latter half of the 1990s. That bubble had burst in 2000. This gigantic lowering of US rates did (eventually) rescue US stock markets. But it did something else. With a time lag, it blew up a much bigger financial bubble than the US stock market had been. It ignited a US real estate bubble
The bubble reached its zenith in 2005, even as the Fed was slowly and predictably raising US interest rates. The higher rates did not impact on mortgage lending at all. There were many reasons for this, but one of the main ones was the explosion of lending in the "sub prime" mortgage area. Any consideration of the "creditworthiness" of the borrowers was totally ignored, and loans boomed. On top of that, of course, was the taking out of second and even third mortgages by consumers literally "cashing in" on the huge valuation increases on their real estate.
The real estate bubble in the US burst a year ago. Late last year, the impact on consumer spending in the US became too big to ignore. But the REAL effects of the bursting of the real estate bubble have only begun - THIS WEEK - to show up in earnest.
All of a sudden, literally out of the blue, there has been a surge of finance companies reporting that rising defaults on mortgage loans were hitting their bottom lines. This would be bad enough if all the lenders had to do was to set aside capital to offset the defaults of the borrowers. It is much worse than that, though, because the lenders are looking at having to repurchase the mortgaqge loans they packaged as bonds and sold into the investment markets. At present, these repurchased loans are coming back with its nominal value down 15 to 20 percent.
This process is putting in grave jeopardy a GIGANTIC segment of the global US Dollar based derivatives complex, which is now in the hundreds of TRILLIONS of Dollars.
Today's global financial system is built on lending and buttressed by debt. This is true not only for the invesmtent instruments themselves, but for the currencies in which these instruments are denominated. All of a sudden, the epicentre of the global financial system, the US, is facing the starting rumbles of what will inevitably turn out to be a debt default of massive proportions.
The situation has become so bad so fast that it is now even being debated in the US Congress.
In such a situation, there is little wonder that Gold has all of a sudden begun to surge upwards once again. And as the situation worsens, as it inevitably will, it is going to be VERY difficult to keep the Gold "price" in check.
The longest break between new highs in the post 2001 Gold bull market so far has been about ten months. The Gold bull market high of $US 721.50 was set on May 11, 2006. That's almost exactly nine months ago. With this sudden eruption of "profit warnings" from major US mortgage companies, the pressure UNDER the Gold price is going to grow very fast.
The table below shows the position of Gold now in four major currencies relative to what it was at the Gold bull market high in May last year. Please note that Gold in Japanese Yen terms has ALREADY - this week - broken out to new bull market highs. We will be keeping this table going until Gold has exceeded its May 11, 2006 highs in terms of all four of the currencies listed below.
Please note that the $US 721.50 bull market high is a major RESISTANCE POINT and that the chances of a pause in the present run up at or near that level is very high. Given the severity of the situation, however, and the absolute certainty that it is going to get a LOT worse, we don't think that new Gold price highs in ALL the currencies in the table below are going to be too long in coming. We'll see.
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