"We cannot remember the start of any year since the US Dollar and Gold were divorced in 1971 when more people were more "bullish" on the prospect for Gold over the year to come. It is disquieting, to say the least."
(Gold This Week - January 9, 2009)
Sure enough. By Thursday, January 15, the spot future price of Gold in New York was down to $US 807.70 - nearly $US 80 below the $US 884.30 level where it had started the year less that two weeks before. Then came the BIG upward bounce on January 16. We have yet to see an instance where an upsurge in publically "bullish" sentiment by mainstream financial analysts towards Gold has not led very quickly to a drop in the Gold price. This one has been no different. What we do not yet know is if Gold has "finished" its correction yet. Sure, the spot future price jumped $US 32.60 on January 16, but don't forget that it began the week with a fall of $US 34.00.
It would seem that as "volatility" calms down to some extent in the paper markets in the lead up to the "changing of the guard" at the White House next week, Gold becomes more volatile.
Next Tuesday, January 20, Mr Obama becomes the President of the United States. This weekend, and it is a long weekend in the US with Monday, January 19 being the Martin Luther King Holiday, the US Treasury is working around the clock once again trying to shore up a banking system which is once again coming apart at the seams.
Meanwhile, financial headlines in the US are becoming more "surreal" by the day. Here's a sample of one, taken at random, reporting on the stock market action on Wall Street on January 16 - Wall Street Rebounds After Banks Report Big Losses.
If your memory stretches back that far, you will remember the halcyon days of the "dot com" bubble at the end of the 1990s when the bigger the loss reported, the higher the stock price went. The difference back then was that none of the "dot coms" were too big to fail, so they all did. If you doubt it, get hold of a ten-year NASDAQ chart and take a look at it. The banks, on the other hand, clearly ARE too big to fail. Hence the "Wall Street rebound". The reasoning goes like this: "Since the banks are too big to fail, the government will continue to bail them out. Since the government will continue to bail them out, they are 'safe'. Government bailouts always work, they HAVE to work, the banks are too big to fail."
What is lost in this little circle of reasoning is a rather important point. The banks in question have ALREADY failed. The proof of this resides in the hundreds of $US Billions which has already been injected into them, in the eradication of official interest rates by the Fed, and in the current frantic activity of the Treasury to set up a "bad bank" which will take over the "illiquid" (read worthless) "assets" from the books of these same banks.
The reason why the commercial banking system in the US and in every other "developed" nation is essential (too big to fail) to the government is the essential services they provide in perpetuating the fiat money system. In any system based on full "faith and credit" - AND NOTHING ELSE - the credit will flow just as long as the faith is maintained. Banks can happily go about their business stockpiling government IOUs as "reserves" and creating new money out of thin air in ever increasing quantities by "crediting" it to their customers' accounts. Mr Bernanke and Mr Paulson are of one mind and one voice in proclaiming at every opportunity that (to qoute Mr Bernanke this week) - "our economic system is critically dependent on the free flow of credit."
This is quite literally true. Mr Bernanke's (and Mr Obama's when he takes office next week) economic system IS critically dependent on the free flow of credit. The days when money was brought into existence by crude coin "clipping" or printing are long gone. Modern money creation methods are almost totally dependent on inducing people to borrow and spend, and the banks are the vital middlemen in this process. The problem for the government is acute when their banking system can no longer perform this vital function. As such a situation worsens, the "responsibility" for borrowing new money into existence falls more and more directly on the government. Hence Mr Bernanke's lowering of official US rates to ZERO last month. Hence the just announced US government budget deficit of $US 485.2 Billion for the first THREE MONTHS of fiscal 2009. Hence the widely rumoured plans that the Fed will start to directly buy US Treasury debt paper (thereby monetising it) as early as next week.
What financial and monetary officials in the US (and almost everywhere else) are in the process of doing is acting to destroy the viability of their "money" in an attempt to rescue their banks - the conduit for getting their "money" into circulation without having to actually "print" it. The end result of their actions will be a destruction of the money as a viable medium of exchange and there is, as yet, nothing on the horizon to suggest they are going to stop.
In such circumstances, those who foresee a "good year for Gold" are certainly doing so on very good grounds indeed. The gyrations in the Gold price this week is just one more indication that the ultimate choice about what to use as money is getting closer. So are the desperate measures now being publically discussed by Treasurers and central bankers everywhere. And next Tuesday, it all lands on Mr Obama's desk.
(Chart appears here in original analysis)
As you can see, a new low was hit on the chart 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
That was two months ago, and you can see the large rally in the $US Gold price since then on the chart. Please note carefully the point at which the chart turned up with the $US 32.60 rise on January 16. IT was right at the downtrend line. The longer this line holds, the greater the chance of an assault on the next downtrend line, currently sitting at about the $US 910 level.
We began the table below in 2007 and have extended it through 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. 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? The US Dollar broke down in the latter half of December. Continue to watch the US Dollar exchange rates and US Treasury yields. When Treasury yields start to rise, the jig is all but UP.
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