Yet another brick fell out of the "wall" this week as the $US Dollar Index (USDX) closed at 81.17 on July 2. This took the USDX below its previous 2007 spot future closing low - 81.25 reached on April 25 - and down to levels not seen since December 2004. The USDX low in the current bear market is 80.60 set on December 30, 2004.
On top of that, yet another nation raised its interest rates yet again this week. The Bank of England raised rates by 0.25 percent to 5.75 percent on July 5, their fifth rate rise in a year. The European Central Bank (ECB) chose not to follow suit when they met on July 5, keeping their rates steady at 4.0 percent. Consensus is all but unanimous that the ECB will raise when they next meet in August. On top of that, most analysts are predicting that ECB rates will reach 4.50 percent (0.50 percent above present levels) by the end of this year.
The last time that the USDX was this low, in late April, spot future Gold stood at $US 684. On July 6, spot future Gold closed at $US 654.80, a little over three Dollars below the level it reached on July 2 when the USDX hit that almost three year low.
The last vestiges of the US bubble markets - the US stock markets - recovered this week too. On July 6, the Dow closed at 13611, only 65 points below the all time high of 13676 (closing basis) it set just over a month ago on June 4. The big move for the Dow on the week came on July 2 - yes the same day that the USDX hit its low for the year - when the Dow gained 126 points. Most Wall Street analysts pointed to the yield on Treasury 10-year paper falling below the 5.00 percent level (to 4.99 percent) as a major catalyst for this rise. By the end of the week on July 6, the yield on 10-year Treasury paper had bolted all the way up to 5.18 percent. US stock markets had not reacted. The Dow closed on its highs for the week, having gained 76 points from its July 2 level.
Now, let's have a look at a very "senior" US Dollar Gold chart. This chart covers Gold all the way back to its $US 102 lows set in August 1976 - almost 31 years ago. On this chart, each "unit" ("X" or "O") is equal to $US 5 and the price must change by 5 "units" (or $US 25) in order for the chart to change direction. This allows us to compress a lot of data (32 years worth in this case) into a chart of a manageable size.
$US 5 x 5 Gold Point And Figure Chart:
(Chart appears in original analysis)
The first question to answer is this: Is the bull market still intact? Clearly it is. If that is the case, then why is a "dotted" trendline drawn through the market lows? The reason for this is that the Gold price is still below it bull market highs - the $US 721 reached back in May 2006.
In one sense, the formation on this Gold chart today is similar to what it was back in September 1980 when Gold was rising to its $US 745 high after having hit $US 878 (spot FUTURE close) back in January 1980. At that point, the bull market still looked to be intact and many analysts were confidently predicting that Gold would soar to multiple $US Thousands per ounce levels. That didn't happen.
Today, we are waiting for exactly the same thing that Gold watchers were waiting for in September 1980. We are waiting for Gold to exceed its bull market highs and thereby confirm the next leg on its bull market. It didn't happen in 1980. Why should it happen today?
To answer that question, let's do a couple of comparisons.
Comparison number one is between Gold and the US stock markets. Between 1971 and 1980, the new "money" created by US credit expansion went into REAL goods, not into financial (read paper) "assets". In 1980, for example, the Dow was LOWER in nominal terms (and much lower in terms of the depreciation of the US Dollar) than it had been in 1971. Gold, on the other hand, had soared from $US 35 to $US 878, an appreciation of 2408 percent. Which market was the "bubble market"?
Today, the situation is the exact reverse. When Gold hit its 1980 peak, the Dow stood at 866 points. Today (July 6, 2007), the Dow stands at 13611 points. That's an appreciation of 1472 percent. Gold is DOWN in nominal terms compared to its January 1980 level by about the same amount in percentage terms as the Dow fell between 1971 and 1980. Which is the "bubble market" today?
The other consideration is the decline in purchasing power of the US Dollar since Gold's 1980 highs. In the first place, Gold remains considerably below its 1980 highs in US Dollar terms. Can you think of any other "investment" (except Silver) or any other producer or consumer good or service in a similar situation? The most common "measure" of US Dollar purchasing power is the Consumer Price Index or CPI. This is a flawed measure, to say the least, since the government has been continually "refining" it for decades to minimise its impact. Flawed as it is, let's look at the numbers:
Let's do the same thing with the Dow
Which investment is "overpriced" on that calculation?
On the chart above, Gold is clearly in an "inverse" head and shoulders formation. In the vast majority of cases, this formation is resolved when the price breaks out ABOVE the right "shoulder" and goes on to set new highs. The first sign that this is happening would be a spot future Gold close back ABOVE the $US 700 level. The definitive PROOF that this HAS happened would be a spot future Gold close of $US 735 or higher. That would signal the next leg on the bull market - and "solidify" the trendline on the chart.
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