On Friday, November 21, in concert with a rebound on US stock markets and as the US Dollar continued to make new multi-year highs on its trade weighted USDX, Gold suddenly woke up with a vengeance. There was a bit of warning. Two days earlier on November 19 as the Dow was closing below the 8000 level for the first time in half a decade, Gold suddenly shot up in European and early US trading. On the day, Gold rose over $US 24 with the PM fix coming in at $US 762. But by the close of trading in New York on November 19, Gold (at least paper Gold) had been put firmly back in the "bottle" - closing at $US 736. Two days later it closed in New York at $US 791.80, up $US 43.10 on the day and the highest spot future close since October 16.
The Fed cut official interest rates twice in October. After holding official rates steady for more than five months, they cut by 0.50 percent on October 8 and by another 0.50 percent on October 29. In the process, they halved the Fed Funds rate from 2.00 percent to 1.00 percent, bringing it down to the low point of the Greenspan Fed rate cutting orgy between 2001 and 2003. That one blew up the last of the investment bubbles, the housing bubble. This one has had the exact opposite effect as actual price deflation has bitten in the US and in many other nations.
Of course, this Fed rate cutting action (not to mention all the cuts by other major global central banks) has merely accentuated the increasing desperation of the global monetary authorities. The last time that the ultimate "safe haven" - short term three-month US Treausury debt paper was yielding more than 1.00 percent was on October 22, a week before the Fed cut their Funds rate to 1.00 percent. The three-month Treasury yield dipped below 0.20% on November 12 and has remained there ever since. And on November 21, the day that Gold suddenly woke up and soared $US 50 in intraday trading, the three-month yield on US Treasuries got as low as an interest rate can get. It closed on the day at 0.01 percent!
On top of that fact, it must be duly noted that for the first time, it actually costs money to buy derivative insurance to protect buyers of US Treasuries against a US government default. Granted, these premiums are nowhere near the HUGE amounts it costs to guarantee against corporate and/or consumer debt default, but nonetheless, they now exist.
There was an absolute refusal to talk about money at all, let alone any form of monetary "reform", in the communique which was issued by the G-20 Heads of State summit in Washington last weekend. There has been an absolute refusal, at least in public, to contemplate any other means of "combatting" the now present spectre of actual deflation than by throwing more money at it by means of ever lower interest rates, burgeoning government deficits and bailout packages of all sizes, descriptions and degrees of futility. In (you should pardon the expression) short, nobody wants to address ANY of the all too REAL problems.
Instead, the political, monetary and financial "powers that be" continue with their "orthodox" measures and increasingly alarmed paper investors stampede into that last resort of "safety" - government debt paper. On the short maturity end, that stampede has now gone as far as it can go in the US with the three-month yield having effectively disappeared. Ironically enough, with the US government now reporting a FALL in consumer prices of 1.0 percent for October, even a zero yield is still "positive". Even so, it can't go any lower. Even the Japanese have not yet come up with a negative (nominal) interest rate.
As you know, we have in recent issues of The Privateer been talking about "second stage deflation", a situation in which the lenders stare impending bankruptcy in the face. A glance at the horrendous falls in the stock prices of the big New York money centre banks this week should dispel any lingering doubts that this situation now exists. We have also mentioned "third stage deflation", a situation in which GOVERNMENTS go broke and/or (what amounts to the same thing) repudiate their debt.
There are lots of precedents for this, of course. The IMF has been bailing out nations on every continent ever since their formation in the wake of Bretton Woods. But there has never been a situation in which almost every nation on earth was facing the same potential implosion. And not since 1931 has there been a situation in which the nation which supplies the world with a "reserve currency" is the prime candidate for "foreclosure". The US became a net debtor nation nearly a quarter of a century ago in March 1985. From that day to this, the chances of the US EVER actually making good on its government debt has been dwindling. But any prospect at all was blown away 9/11 - not by the event itself - but by the reaction of the Bush Administration and the US Establishment to 9/11.
By the time Mr Obama becomes President next January, Mr Bush will have all but DOUBLED the US Treasury's funded debt in his eight years of office. It is clear that this profligacy, above all other causes, has irreparably damaged the US position in the world. It is equally clear that the US Dollar cannot go on much further as the world's reserve currency. And when that happens, the US will have to service and repay debt by producing real economic goods, not merely by printing more swathes of US Dollars and US Treasury debt instruments.
But none of this seems to matter to all those stampeding into Treasuries. For their entire lives, this is the "quality" they have been taught to fly towards when all else fails. There has seldom, if ever, been a flight to US Treasuries like the one which has taken place over the past month. And now it has climaxed as the short-end of the Treasury yield curve reaches ZERO.
Small wonder that Gold woke up on November 21. When paper gets this close to the end of the line, REAL money can no longer be ignored. And, of course, Gold is not being ignored. Global demand for the PHYSICAL METAL is at (proportional) highs not even exceeded by the Gold panic of late 1979-early 1980. Increasingly, the supply is simply not there at all. But now, the paper Gold markets have taken a BIG jolt. The situation has suddenly become very much more interesting.
(Chart appears here in original analysis)
As you can see, a new low was hit on the chart last week when spot future Gold closed in New York at $US 705 on November 13. This pushed the chart two "Xs" below the $US 715 support level established in late October and equalled early this month. Then came the big turnaround - and upturn on the chart - of November 14. The region between $US 700-720 firmed as SOLID support for Gold. That support "zone" has now been emphatically confirmed as Gold bolted all the way from $US 736 to $US 790 on November 20-21.
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.
In mid (northern) summer, 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 was a new 2008 high for the metal in terms of the Japanese currency. Then the Fannie/Freddie bailout plan went to work. Three weeks ago, on October 8, with the announcement of co-ordinated interest rate cuts by SIX major world central banks (including the Fed), Gold hit new all time highs in terms of the Australian Dollar, the Euro and many other major world currencies. That situation was reversed with the onset of savage global deleveraging. But this week, Gold turned up again with a rush. It will be interesting which of these currencies hits a new low in terms of Gold first. The top candidate is the Aussie Dollar of course.
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