That's what we called 2008 in our first Privateer of the year.
"On December 11, futures contracts on the Chicago Board of Trade showed an 84 percent chance that the Fed will actually lower by 0.75 percent to a target Fed Funds Rate of 0.25 percent at the December 15-16 meeting."
Gold This Week - December 12, 2008
The Chicago Board of Trade was right - futures traders often are, they don't stay in business long if they're not. But the Fed did not actually cut to 0.25 percent, they cut to a "target range" between ZERO and 0.25 percent. In effect, they announced that the cost for borrowing "excess reserves" from the Fed was non-existent. The reaction was instant. Treasury yields hit all time lows right across the maturity spectrum from one-month to thirty-years. The US Dollar dived back below the 80.00 level on the USDX for the first time since September. And Gold jumped almost $US 26.00 to $US 868.50, its highest spot future close since October 9.
That momentum was not sustained to the end of the week. Treasury yields stopped falling, having already hit all time lows before the Fed even announced the elimination of their "Funds Rate". On December 18, the European Central Bank (ECB) announced that it was cutting the rate it pays for banks to deposit with it by 0.50 percent and raising its emergency lending rate. Both measures were clearly designed to try to wean European banks off relying totally on their central bank and get them to start lending to each other and to the European private sector again. These cuts will come into effect on January 21. The ECB meets for the first of its "rate setting" get togethers for 2009 on January 15. Of course, future FOMC meetings are now going to be a non-event, unless and until the US Fed gets around to re-establishing an actual interest rate again. For the record, the first FOMC meeting for 2009 is scheduled for January 27/28.
Then, on Friday, December 19, the Bank of Japan (BoJ) got into the act. It actually cut its controlling rate - by 0.20 percent from 0.30 percent to 0.10 percent. The BoJ also announced that it was going to start buying Japanese commercial paper and would increase its monthly purchases of Japanese government bonds from 1.2 to 1.4 TRILLION Yen. Hilariously enough, these actions did NOT have the desired effect. The US Dollar rose substantially on the day, but not against the Yen. The main move was against the Euro, the Japanese Yen actually gained against the $US despite the big rally on the USDX.
Whether this rally was on short covering is not proven, but it is almost certain that a lot if it was. The USDX hit a three year plus high of 88.41 a month ago on November 21. By December 17, the day after the Fed cut its rates to ZERO, the USDX had given back about half its gains. The temptation for the "shorts" to take some profits would have been great after such a precipitous fall. They surely did.
The same is true of $US Gold. In the less than two weeks between December 5 and 17, the spot future $US Gold price had risen from $US 752.20 to $US 868.50. That's a gain of $US 116.30 or 15.5 percent. The temptation to take profits on the futures markets was again large. They were taken.
So, as we approach the end of 2009, Gold in $US terms stands at almost precisely the level at which it began the year. There is no other class of investment which can boast a record anywhere near that good. With three major exceptions. The first is the Japanese Yen which is up by 20 percent against the US Dollar so far this year. The second is the US Dollar itself, which despite its recent precipitous falls is up by 7.5 percent on a trade-weighted basis this year. And the third is, of course, US Treasury debt paper which has enjoyed its best year in more than a decade and which is in the throes of an historic blow-off as the year comes to a close and official US interest rates become a thing of the past.
What are the prospects for these three "anomalies" in a 2008 investment wasteland as 2009 approaches? The Japanese government has the biggest government deficit and government debt on a per capita ratio of all major world nations, although the US is poised to take over that spot with their anticipated $US 1-2 TRILLION deficit for 2009. The US Dollar is a spent force, its recent "resurgence" a product of global debt deleveraging and desperate US repatriation of capital. Its prospects are abysmal, and being made worse by the day by the fantastically dangerous and irresponsible actions of its goverenment and central bank. There are no prospects whatsoever that the incoming Obama Administration will curb ANY of these excesses.
As it always does in times like these, that leaves Gold. Gold has proved its worth this year to a greater extent than it has in any other year since it was divorced from the US Dollar in 1971 and the world's currencies "floated" in 1973. In the face of fiscal and financial carnage, it has maintained its purchasing power intact. Nor is there any prospect that this situation will change in the foreseeable future. Why should it? It never has in the past.
Including the traditional half-days trading on December 31, there are now seven trading days left in 2008. The world's money managers and manipulators are all hoping for a modest Christmas present and that is that they can get through what is left of the year without any more crises breaking out. They may get their wish, but they have to go back to work next year too, and that is the point when all the monetary insanities unleashed on the world this year will REALLY hit home.
(Chart appears here in original analysis)
As you can see, a new low was hit on the chart a month 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 in November. Then came the first 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 between November 13 and November 28
Two weeks ago,just over half that rise was given back as Gold retreated to the top of its previous distribution zone. That proved to be SOLID support, as the movement on the chart since Gold rebounded from the $US 750 area shows.
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? As stated above, the US Dollar has broken down over the past two weeks. Continue to watch the US Dollar exchange rates and US Treasury yields. When Treasury yields start to rise, the jig is all but UP.
The next publication date for "Gold This Week", and the last for 2008, will be December 26. We wish all our subscribers a very MERRY CHRISTMAS!
| |||||||||||||||||||||||||||||||||||||||||||||||||