It's official, the week just ended was the worst week for paper Gold trading on US futures markets for 25 years - and that is in percentage, not nominal, terms. For the week, the spot future Gold closing price was down 8.4 percent. We haven't seen a "rout" like that since February 1983. Over the last week of February 1983, the spot future Gold price fell $100 from $US 500 to $US 400. We remember it well.
The great US and world stock market boom began about six months earlier in August 1982 when a debt default scare from Mexico triggered some big global intervention and a concerted rate demolition job by the Fed. The US stock market took off, the US Dollar took off, and Gold took off. All three rose in tandem until late February 1983. At that point, the boom was lowered on Gold - and the US Dollar and the US stock market had the field cleared for them. On a trade weighted basis, the US Dollar bull lasted another two years until February/March 1985 when the US Secretary of Commerce announced that, for the first time since before WWI, the US had become an international net DEBTOR nation.
The US stock market boom lasted much longer, of course. There was a massive "hiccup" in October 1987 when the Dow suffered its biggest one-day nominal and percentage fall ever - and Gold made it back to the $US 500 level it had plunged from in early 1983. But US stock markets recovered fairly quickly and kept on rising right up until the beginning of 2000 - almost two decades after the bottom. Indeed, there was another huge US and global market boom from 2002 right up until late last year, this one similar to the "Reagan Boom" of the mid 1980s with the US Dollar falling throughout.
The savage stock market boom which imploded in 2000 was followed by a housing boom, and yet another stock market boom, and a commodities boom. And through it all, Gold (relatively) quietly quadrupled - from its lows of $US 250 hit in 1999 and 2002 to its high spot future close just above the $US 1000 level this March. Exactly a month ago, in mid July Gold had climbed back to within about $US 25 of that March high and global commodity prices were going ballistic. Then came the "housing bill", the bailout of Fannie and Freddie, and the increase in the US Treasury's debt limit by $US 800 Billion to its present level of $US 10.615 TRILLION. As a harbinger of things to come, the US government has admitted to an official deficit of $US 102.77 Billion for the month of July, triple the deficit in July 2007.
We have just passed through a month of the most amazing market gyrations - not just in some markets - but in ALL markets - that The Privateer crew can recall. Central to this has been the sudden resurgance of the US Dollar and the toppling of US Dollar denominated commmodity prices. The Precious Metals were late to get aboard this latter bandwagon, but over the last two weeks, they have spiralled downwards. The first week of August saw Gold drop most of the way back to the lows it set in June. The second week of August has seen Gold (and most certainly Silver) take out those lows with a vengeance and drop to levels last seen in December last year. On August 15, for the first time this year, the spot future Gold price closed below the $US 800 level.
The spectacular Gold and Silver price falls this week have also coincided with a war as they almost always do. This time, the US was not directly involved. Instead, it was the US client state of Georgia whose leader chose (or was instructed?) to take advantage of the opening of the Olympic games in Beijing to storm into the independent enclave of South Ossetia with an armed force which was trained, supplied and advised by the US (and Israel). To the great chagrin of the Georgians, and the Americans too, the invaders were promptly met by Russian troops, routed, and driven back into Georgia in full retreat.
So what is going on here? Clearly, the global debt based financial system and its lynch pin, the US system, is rapidly deteriorating. The collateral foundation is literally melting away to nothing as exotic trading mechanisms such as CDOs are "revalued" at pennies on the Dollar. The Fed and the other major world central banks are, at present at least, unable to overcome a gartanguan deflationary tidal wave as more and more debt paper is either frozen, drastically slashed in declared market value, or simply extinguished altogether. This debt paper is the underpinning of the financial system and of the money which fuels it.
The gyrations on the markets, though, come from a different source. Remember, all this carnage, including the huge falls in $US Gold and Silver prices, are taking place in the paper markets. Demand for the physical metal has not let up at all. In fact, the opposite is the case. This week, the US Mint has suspended sales of the popular American Eagle Gold bullion coins and is refusing orders from dealers. They did the same with their Silver coins in May when sales to the public were terminated. Clearly, at current prices, they literally cannot get the metal they need to mint the coins.
What is going on in the financial markets right now is frantic gyrations from the gigantic hedge fund community. For most of this year, these funds have been carrying "wrong way" bets on almost every paper market they frequent. And don't forget, the amount of capital involved here is immense and the leverage is stratospheric. The inflows into these funds, which was huge right up until early this year, is rapidly drying up. On top of that, their "sophisticated" trading strategies have produced almost nothing but ever bigger losses. Hedge funds thrive in bubble markets. The paper bubbles have all burst. They also thrive on the credit expansion which fuels bubble markets. What they face now is the opposite, a credit CONTRACTION of huge proportions.
The market gyrations of the past month, including the US Dollar rally and the Precious Metals dive, has got little or nothing to do with so called "fundamentals". The charts which show what is going on are graphic representations of the death throes of the hedge funds. Please remember in this context that all the major banks have them. And please remember also that these funds have been the ultimate fuellers of the gigantic global credit expansion which has now imploded. Without them, the massive wave of "securitisation" - the stapling together of any and all varieties of debt paper into supposedly "valuable assets" - could never have been brought to fruition. And without that "securitisation", the debt fuelled investment bubbles of the past decade plus would have died for lack of fuel.
Technically, the fact that spot future Gold is now below $US 800 means that it has now corrected by more than 20 percent (21.1 percent actually) from its March highs on a spot future closing basis. This is the traditional definition of a bear market. In 2006, the spot future Gold close fell from $US 721.50 in May to $US 566.50 in mid June. That's a fall of 21.5 percent, almost exactly the same as the present "correction" as it currently stands.
It took Gold over a year - until September 2007 - to recover from its 2006 correction. It has now been five months since Gold hit its March 2008 highs. Are we in for a replay? Possibly. But the global credit crunch was not yet visible to many during Gold's correction in May-June 2006. It is front and centre today.
Demand for physical Gold and Silver has not faltered in the slightest. The cost of mining and refining Gold and Silver has skyrocketed. Global Gold production has been falling for years and is now at multi-decade lows. But Gold is not globally priced at the mine head or at the refiner, it is priced on the futures markets. And what is traded there is not Gold, it is paper claims to Gold which can and are settled routinely without so much of a gram of the actual metal becoming involved.
We are in the thick of the battle to save the global fiat credit-based paper money system in general and its "foundation" the US Dollar in particular. We are also in the midst of a fire sale on the only ultimate form of insurance against the implosion of that system, the precious metals in general and Gold in particular.
(Chart appears here in original analysis)
As you can see, the price action on this chart has taken Gold just below the uptrend line which has supported the entire bull market from 2002 to date. We also have descending lows on the chart - the $US 1000 high set in March and the $US 975 high set just over a month ago in mid July.
We began the table below in 2007 and have extended it into 2008, even though Gold in all four currencies in the table remain well above their 2006 highs. Gold breaking out to new all time highs in $US terms at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold improved upon those January levels in all four currencies as spot future Gold closed above the $US 1000 level for the first time ever in the middle of March.
A month ago, we had a new entry on the table for the first time since Gold topped the $US 1000 level in March. On July 17, Gold rose to 103233 Yen. That's was a new 2008 high for the metal in terms of the Japanese currency.
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