Our headline on this piece last week was "Emerging As A Clear Winner". Did we speak too soon? We think not, despite the fact that Gold has dropped every day this week on the New York Futures markets and is now back to just above the top of the distribution zone ($US 710-750) it was in over the month up to two weeks ago. On the week, spot future Gold fell exactly $US 64.00 or 7.8 percent.
Two weeks ago, the title of the piece on this page was We're Running Out Of "Safe Havens". In the piece, we pointed out that the yield on Treasury "cash" - the three-month Treausury note - dipped as low as an interest-bearing instrument can go on November 21. On that day, the yield on the three-month note was 0.01 percent. On December 5, the yield was still 0.01 percent, having budged hardly at all in the meantime. But since then, with the short-end of the Treasury's yield curve having reached rock bottom, the curve itself is still flattening out as longer-term yields keep falling inexorably.
Since November 18, for example, the yield on the Treasury's thirty-year bond has plummeted by more than 100 basis points. The bond yielded 4.13 percent on November 18. By December 4, the yield was all the way down to 3.06 percent. The last time that the Fed had its controlling Funds Rate at 1.00 percent (its present level) was over the year between mid 2003 and mid 2004. Over that entire period, the Treasury's 30-year bond yield only ever dipped below the 5.00 percent level briefly. It has certainly never been as low as it is now, in December 2008.
Of course, there is almost universal expectation that the Fed will lower their Funds Rate further, to 0.50 percent or even lower, at the last FOMC meeting of 2008 on December 15-16. And a rapidly growing army of pundits are predicting a "zero" rate or something close enough to it so as not to matter early next year.
Here lies the problem. It is by no means confined to the US but it is most acute in the US. Everybody who has any "money" left is increasingly worried about hanging onto it. The prevalent attitude is that if it isn't "government guaranteed", I don't want to touch it with a barge pole. In its entire history, the US Fed (and the other major global central bankers) have never expended such energy on pushing on a string. And never has the string refused to "push back" so obstinately. The more "liquidity" they pump into the system, the more toxic paper they pile into their balance sheets, the more "guarantees" they issue, the deeper the malaise in the real economy becomes.
It has been reported this week that the crash dive in commodity prices which began in July 2008 is now considerably worse both in its magnitude and its swiftness than the fall during the entire 1929-1933 economic and financial collapse. In the US, retail sales in November had their biggest one month fall in 35 years and the acceleration of the collapse is unprecedented. With Gold now down a "whopping" 10.3 percent in US Dollar terms this year, Oil is down over 72 percent since July 2008 and most other basic commodities have had falls of a similar magnitude. The CRB index has fallen 47 percent since July. Official US unemployment has reached 6.7 percent as 533,000 jobs were lost in November. That's 28 percent of the total for the year in one month. When factoring in people looking for work (not counted officially) and part-time workers looking for full-time work (not counted officially), the REAL US unemployment rate is now estimated (unofficially) at 12.5 percent.
Major global stock markets have lost betweeen one third and two thirds of their total value since the start of this year, with the majority of those losses coming during the last few months, the period when major central banks have thrown all money-creating caution to the winds. But no matter how fast they try to pump new "money" into the system, the devastating deflation in the valuation of NON "government-guaranteed" assets of all varieties is simply too big to be compensated for.
In this scenario, Gold (and to a lesser extent Silver) are as far away from being a "government guaranteed" asset as it is possible to get. Silver has been savaged, losing more than half of its value in $US terms since July. But Silver is not primarily a MONEY metal. Gold IS primarily a MONEY metal. Its fall in terms of paper money in general and US Dollars in particular is a mere fraction of the carnage which has been wrought everywhere else.
Those who do NOT trust in the value of "government guarantees", both inside and especially outside the US, are flocking to physical Gold and have been doing so for the whole of this year. They are still the tiny minority, though, the vast majority of individuals still preferring to trust in the printing press which is the only way that any such "government guarantees" can ever ultimately be met. The great currency and money commentator Franz Pick called government debt - "certificates of guaranteed confiscation" - way back in the 1970s. He did so for the simple reason that the only thing that stood "behind" government debt (all connection to Gold having been renounced) was the future taxing power of government.
In a fiat money system in which no national currency is redeemable in Gold, the issued debt of any government is precisely what Dr Pick called it more than 30 years ago. Those comparative few who know this are not slackening their search for physical Gold (it is getting very hard to find) at all. Outside the US, even Gold stocks are reflecting a slowly growing unease about all these "government guarantees". The two major US Gold stock indexes, the HUI and the XAU, were both down well over 10 percent this week with Gold in $US terms down 7.8 percent. But in Australia, the XGD Gold stock index fell a mere 3.4 percent. Granted, the Aussie XGD is down 41 percent on the year (considerably less than the All Ordinaries by the way) in the face of a considerably higher Gold price in Aussie Dollar terms, but still the recent moves of the index are getting ever more "sticky" on the downside.
There is no way of knowing how long the present attitude of "government guaranteed" at all costs will last. Of course the monetary powers that be in the US and everywhere else will try to make it last as long as possible. Their global system depends on it. But if you have ever had any qualms about the old tired phrase - "I'm from the government, I'm here to help you!", then the notion of a "government guarantee" should have you breaking out in a cold sweat.
(Chart appears here in original analysis)
As you can see, a new low was hit on the chart three weeks ago 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 last 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" was emphatically confirmed as Gold rose by just over $US 110 since that November 13 low on November 28
This week,just over half that rise has been given back with Gold now back to the top of its previous distribution zone. Watch this chart closely. The point of the upturn may prove to be VERY interesting.
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 which is still going on. How much longer? Watch the US Dollar exchange rates. And watch US Treasury yields.
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