This week, the $US Index (USDX) fell almost a full point from 81.26 to 80.39. In the process, it broke below its 2007 lows and then went on to break below its previous bear market lows set at the end of 2004. Gold, in $US terms, went in the opposite direction. Over the week, the USDX fell 1.07 percent while $US Gold rose 1.91 percent
Our chart from last week has yet to turn up, but it did get close this week. While spot future Gold did trade above the $US 670 level on an intraday basis this week, it did not close above that level. The closest it got was the $US 668.30 close on July 12.
$US 5 x 5 Gold Point And Figure Chart:
(Chart appears in original analysis)
Once again, we are looking at a spot future Gold price of $US 670.00 or higher to form an upturn on the chart.
Above that is the 2007 high just above the $US 690 level. And above that is the bull market high of $US 721.50 set on May 11, 2006, more than fourteen months ago now. Finally, a spot future Gold close of $US 735 or higher would be THE signal of another leg in the Gold bull market.
Please note that in May 2006 when Gold reached its $US 721 bull market high, the USDX stood at 84.07. Today, with Gold at $667, the USDX stands at 80.39. This means that (with the exception of the Japanese Yen which has fallen from 103 to 122 against the $US), Gold is down against all major world currencies over that period. Down further than it against the $US. For example, if you look at the table at the bottom of this page you can see that in May 2006, Gold in Aussie Dollar terms was $A 928.60. Today, it is $A 765.30.
For Gold in Aussie Dollar terms to regain its May 2006 highs at present exchange rates, the price of Gold would have to be above the $US 800 level. A similar level would be required for Gold to regain its bull market highs in terms of many other currencies, notably those which have been the major beneficiaries of the Japanese Yen "carry trade".
Nothing could better reflect the difference between money based on tangible economic goods (Gold) and money based on promises to pay than todays global headling rush after "yield". A system which has "IOUs" as its ultimate underpinning can only function for as long as these IOUs are not presented for final payment. The action of doing so would collapse the system.
The way this would work is easy to see on the indivdidual economic level. In the US, in Britain and in Australia - foreclosures are increasing exponentially as more and more mortgagees are being pushed into a position where they can no longer service their debt. As this happens, the housing markets which depend on the ability of the buyers to go on servicing their debts is imploding. Loans are seen to be viable as long as interest payments are being received. When they are no longer being received, the lender is left with no option but to sieze the economic good against which the money was lent.
In the case of a loan advanced to buy a house, or a car, or any other concrete economic good, there is at least something to be reposessed by the lender. But how is one to reposess the "full faith and credit of (fill in your nation's name here)"? The Italian Bankers of the early sixteenth century could not "foreclose" when Phillip II of Spain could no longer service his loans. There was nothing tangible behind their loans. The Asian holders of US Dollar "reserves" cannot foreclose against George II today - for precisely the same reason.
In the sixteenth century, the upshot was that the Italian Bankers went bankrupt and Spain declined into stagnation for centuries. Today, we face the same end outcome in principle, but the situation is worse because there is nobody outside the US Dollar paper system anymore. It is all encompassing. It is global. There is of course talk about another currency - the Euro, the Yen, even the Russian Rouble - stepping in to fill the breach when the US Dollar inevitably collapses. But there is no fundamental difference between these currencies and the US Dollar. All are promises to pay backed by nothing. All rely on the "full faith and credit" of the government(s) which issue them.
Right now, the world of finance is enmeshed in an ever more desperate search for yield, and as much yield as they can get. The concept of risk has been utterly tossed aside. It is a question of either getting enough "return" on your investment to continue to pay the interest on your debt or collapse into a smoking hole in the ground with your entire financial "structure" having been exposed as the sham it is.
That is what the carry trade is designed to accomplish. That is what the entire edifice of "derivative" paper is designed to accomplish. The world is engaged in a desperate race to keep their debts "viable" by the insane means of creating ever more of them. This, as long as it lasts, is supposed to keep churning out enough "yield" to keep the servicing costs from swamping the system.
Well, in the REAL economy, the servicing costs ARE swamping individuals by the millions and tens of millions. They are losing or have lost the race. Their debts stand exposed because they have lost the ability to service them. It is only a matter of time until this cancer eats its way from "main street" to Wall Street.
Why has Gold been languishing for more than a year now. Because it cannot help those who are drowning in debt. The "diversion" of precious capital into an asset which pays no interest at all is seen by most as being suicidal.
If there is one thing above all others that you can do for your future prosperity, let alone your peace of mind, it is to strain every sinew to reduce your debt to an absolute minimum. Or better still, if there is any way to do it, eliminate it entirely. The vast majority in the "developed" world today are on a debt treadmill which will consume them when they can no longer maintain a position which gives any rational prospect that they can either repay or SERVICE their debts.
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