Looking at $US Gold prices over the years, this is a quite normal pattern. Seasonally, Gold prices usually rise between mid March and late April - early May and almost always fall, quite often abruptly, as May wears on. That was certainly true last year when Gold hit a high of $US 721 on May 11 only to plummet all the way down to $US 637.50 less than two weeks later. It was true this year too when Gold breached the $US 690 level twice in late April only to fall as low as $US 653 on May 24 and again on May 30.
Of course, over the past two days, the $US Gold price has bolted upwards by a little more than $US 18 to close on June 1 at $US 671.20. Last year, the May/June correction didn't bottom out till mid June with Gold having plummeted from $US 721 to about $US 562 in just over a month. Normally, Gold in seasonal terms carries its May weakness through until mid late June before rallying in the late June to early/mid September period.
There are exceptions to this "rule" of course. Gold has not ALWAYS gone down in May/June. And the rebound in the $US Gold price over the last two days of this week does not necessarily mean that the bottom of the correction is going to be the $US 653 level Gold hit on May 24 and May 30. What this Gold price rebound has given us so far is a new trading range for Gold with its major resistance at or about the $US 690 level and its now established support just above the $US 650 level. As of June 1, Gold was hovering right in the middle of that range.
As we have pointed out in several recent "issues" of GTW, Gold has now spent more than a year below its bull market high - the already mentioned $US 721.50 spot future close it reached on May 11, 2006. This is the longest period it has spent without setting a new bull market high since the present Gold bull market began more than six years ago in 2001. Not so coincidentally, this period jibes almost perfectly with the breakdown of the great US housing bubble, the LAST great source of funds to keep the US consumer rampage from faltering.
Clearly, the US housing bubble is now nothing more than a memory. Just as clearly, the US consumer, bereft of ever rising house prices against which to borrow and go on spending, is suffering. The US economic "growth" rate for the first quarter of this year, originally announced at an anaemic 1.3 percent, has now been revised down to a barely visible 0.6 percent. "Offsetting" this, the US savings rate has dipped MUCH further below the ZERO line. The latest report is a rate of MINUS 1.3 percent.
And now, the very last attempt to erect a "Potemkin" facade in front of what is rapidly turning into a US economic wasteland in REAL terms is the inexorable rise of the US stock market. Since the "China scare" at the end of February when the Chinese stock market dumped more than 11 percent in one day, the Dow has risen just under 13.5 percent, setting all time highs on an almost daily basis for what seems to be months now.
Almost all of this rise has, of course, come on the back of a new avalanche of borrowed money, much of it used by the companies themselves to buy back their own stocks. If the present rate of stock buybacks so far in 2007 were to continue for the rest of this year, the total would approach the $US 1 TRILLION level for the year as a whole. The situation is tailor made for a crash, it's just a matter of when.
That "when" may well come sooner rather than later. The most OMINOUS development on US markets has taken place over the past month or so and is now accelerating. NOBODY on Wall Street wants to talk about it. We refer to the rise, which is now accelerating, in the yeilds on US Treasury debt paper.
Over the six weeks from mid February until the end of April, the Treasury yield curve as measured by the difference between two and ten-year yields had turned positive again after having languished in negative territory over the previous eight months. At the beginning of May, the curve turned negative again. And with that, yields started to rise right along the curve from short-term to long-term. Over the past week, that rise has accelerated.
This development, if it continues, will inevitably be DEADLY for US stock markets. It will also be potentially deadly for US consumers as the rising "cost of money" combined with a "savings rate" which is already negative combine to choke off spending. And contrary to the pious platitudes of Wall Street, it will further discourage foreign buying of US debt instruments of all descriptions. Don't forget, the price of a debt instrument goes in the opposite direction to its interest rate. As rates go UP - the price that can be recovered on the secondary markets for the debt instrument goes DOWN.
That might be bearable if the exchange value of the US Dollar held up, but it won't. Rising US market rates are a direct consequence of FALLING perceptions of the creditworthiness of the borrower and a HEIGHTENED caution over the future purchasing power of the currency in which the debt is denominated. US interest rates have been artificially held down for so long and with such tenacity that they are now (even with recent rises) only a small fraction of what they would be in a genuinely free market situation. Most lenders, especially foreign lenders, know this full well.
So now, we come full circle back to Gold. The immediate catalyst for the abrupt spurt in the Gold price has been an announcement by the European Central Bank (ECB) that it contemplates no further Gold sales between now and September. This announcement, coming as it has just after a G-8 meeting of Finance Ministers and just before the G-8 meeting of Heads of State which will take place in Germany next week, is much more political than it is "economic". It is a well known fact in Gold circles that a major factor in Gold's inability to break through the $US 690 level in late April and its subsequent falls in May was a result of heavy Central Bank Gold selling in Europe. That, according to the ECB, has now stopped.
Seasonally, we are now in the middle of the period - early/mid May to mid/late June - during which Gold often corrects. We have seen a correction in May this year. But that correction has been halved over the past two days of trading in New York. The leaders of the G-8 Heads of State meeting next week in Germany are at daggers drawn (figuratively speaking), none more so than President Bush and President Putin of Russia. For two months now, the rest of the world has been bending over backwards to "help" the US government maintain a facade of economic health to hold between Americans and the REAL state of their economy. This has bought them time. It has also, to this point, deflected the Bush Administration from their plans to further distract their citizenry with a new war - this time on Iran.
But the price that has had to be paid for all this is a steady acceleration of an already out of control surge in world "money supply". Almost every major nation in the world (including the US which no longer officially supplies the figures) is facing money supply growth of more than 10 percent a year. This is rampant inflation, which if not curbed soon has a huge potential to turn into runaway inflation.
The ongoing boom on world stock markets reflect this. So does the surge in US Treasury bond yields over the past month and their acceleration upward this week. The strains, both political and economic, are nearing the breaking point. The break could come next week at the G-8 meeting. It could come with a US attack on Iran. It could come at any time.
So far, the two BIG signals of this increasing strain are the rising yields on US Treasury debt and the sudden surge in the $US Gold price this week. The pressures are immense. As already mentioned, Gold has been trading below the bull market high it set in May 2006 for over a year now. We don't think it will be doing that for much longer. The situation may be contained for the month of June. The chances of it being contained until the end of the northern summer are remote.
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