Last Friday, Gold rose $US 26.10, probably its biggest one day nominal rise in the entire bull market yet. It moved a touch higher on Monday, November 26 (see the new bull market and all time high on the Aussie Dollar Gold price in the table below), and then the great "turnaround" began. Beginning with US markets, global stock markets zoomed higher. The US Dollar picked itself up off the floor and gained more than a full point on the $US index (USDX) over the last two days of the week. And the $US Gold price fell $US 44.30 between November 27 and November 30.
Two weeks ago, $US Gold fell well over $US 50 in two trading days. Last week, it rose almost $US 50 in three trading days. This week, it has fallen $US 44 in four trading days. The swings are getting a bit longer in duration but the volatility has certainly ramped up severely.
This is not surprising. Gold is chasing its "elusive" $US 850 high set back in January 1980. It has not "caught it" yet, but there are a number of big differences between what is going on now and what was going on way back then. Yes, the spot Gold price did close at $US 850 on January 21, 1980, but spot Gold only closed above the $US 800 level TWICE - on January 18 and January 21.
Here's the record of Gold's rise - and fall - in the days surrounding that all time high:
That is a blow-off - and its aftermath. In just over two weeks, the $US Gold price rose 36 percent and fell back to where it had started from. Now compare that to what has happened since Gold closed above $US 800 for the first time since January 21, 1980 - on November 2, 2007.
Including the $US 808.50 Gold close on November 2, the spot future Gold price has closed above the $US 800 level on twelve days this month. Its high for the month was $US 837.50 set on November 8. Its low was $US 778 on November 19. It closed the month on November 30 at $US 782.20 - just above its lows for the month.
Now, contrast what was going on in 1980 to what is going on now. In both periods, the US Dollar was under great pressure on global currency markets. In both periods, drastic action was deemed necessary by the financial powers that be inside and outside the US in order to "stabilise" the situation.
This is where the similarities end. Towards the end of 1979, the Chairman of the Federal Reserve, Paul Volcker, took an action which the Fed had not taken previously, and has not taken since. In order to save the US Dollar, he announced that under his Chairmanship, the Fed was going to STOP targeting interest rates and start to target monetary quantities. That's right, amazing as it may seem from our "modern" viewpoint, Mr Volcker let US interest rates alone to find their own level.
Needless to say, with the pressure then on the US Dollar, US interest rates soared. So, initially did the $US Gold price. But there came a point in the climb of US rates where first foreigners and then Americans decided that the risk of holding Dollars and Dollar-denominated "assets" was commensurate with the rates on offer. The Dollar stopped falling and Gold stopped rising - abruptly.
Today, what is the "cure" for a US Dollar under pressure? As far as the present day Fed under Mr Bernanke is concerned, it is injecting an ocean of new liquidity into the system and LOWERING official US rates. This is the exact opposite of what happened at the end of the 1970s. The reason for this change is not hard to find. Today, the global system in general and the US in particular literally cannot afford higher US interest rates. In the early 1980s, rates of 20 percent plus led to a long and quite severe recession. Today, interest rates of less than a quarter of that level have caused a global credit freeze and are threatening a systemic collapse.
In 1980, "melting the credit ice" meant accepting an inevitable recession by offering interest rates high enough to entice the markets to buy US debt paper (and US Dollars). Today, the financial powers that be will not accept a recession, so they are taking steps which, in the not so long term, guarantee a DEPRESSION of huge magnitude.
If Mr Volcker had refused to relinquish control of US interest rates at the end of the 1970s, the US Dollar would likely have collapsed irretrievably and the world we live in today would be VERY different. Instead, he let rates rise to market levels just long enough to entice the world back into US Dollars, and then put his hands firmly back on the US interest rate levers, when Mexico threatened to default on their sovereign debt (most of it owed to New York money center banks) in June 1982.
The Fed's control of interest rates has never been relaxed since and the result has been a quarter-century hyper inflation of financial assets of all descriptions. Now, the life blood of those assets, the commercial banks' ability and willingness to lend - and borrow - has frozen up. The Fed's solution (and the US Treasury's) is simple. If the markets won't borrow - WE WILL!!
This has been tried countless times in monetary history. If taken far enough, the end result has always been the literal demise of the currency of the nation which tries it and the utter collapse of financial "assets" (aka debt paper) denominated in that currency. With their plans to flood the markets with "liquidity" in December, the Fed and its equivalent Central Banks all over the world are getting uncomfortably close to the point of no (or very difficult indeed) return.
Gold has now bounced off its all time high twice in $US terms in the past three weeks. Clearly, ALL the financial stops are being pulled to make sure it doesn't actually get there - until the end of the year. What about next year, now only a month away?
The more the fiat paper financial system is bent out of shape by monetary and interest rate manipulation, the more dangerous it becomes. The more dangerous it becomes, the greater the effort to hold down the escape from that system - the precious metals - Gold and Silver. We are now seeing the latest of a long list of episodes of this. The only question left to be answered is will the financial powers that be lose control this year, or next year? Either way, they will surely lose control.
Please note that all four currencies in this table have set new bull market highs this month. The Aussie Dollar high is also an all time high.
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