"When Treasury yields start to rise, the jig is all but UP."
(Gold This Week - January 16, 2009)
Since you are reading this you will almost certainly know that Gold's upward trajectory steepened dramatically on January 23, the spot future price climbing above $US 900 in intraday trading in New York and closing for the day up $US 37.00 at 895.80. Over this shortened trading week (January 19 was the Martin Luther King Jr holiday in the US), Gold rose almost $US 56 and climbed back into the "black" for the year in $US terms. On top of that, trading volume and open interest both increased markedly (especially on January 23) on US markets.
With January still having a week left to go, Gold has now been through an almost $US 100 trading range on the month, sliding fairly dramatically over the first two weeks only to recoup all those losses and more since January 15 when it closed at $US 807.30. Of course, the global financial system has once again worsened since then with the growing crisis in financial stocks and banks all over the world. But something else has worsened, and this one is far more potentially damaging than any crash, however severe, in the stock prices of the world's major banks.
On December 18, 2008, two days after the US Fed in effect eliminated its "Fed Funds" rate by cutting it to a target range between ZERO and 0.25 percent - US Treasury 30-year bond yields hit an all time low of 2.54 percent. By the beginning of 2009, the yield had risen to 2.79 percent. On January 15 as Gold hit its January low, the 30-year bond yield was creeping higher, closing at 2.87 percent on the day. By the end of last week, the yield had not moved, it closed at 2.87 percent on January 16.
But THIS week (January 19 - 23) the yield on the US Treasury's 30-year debt paper has SOARED - rising from 2.87 percent to 3.31 percent! That has led to the biggest plunge (don't forget with debt paper, yields and prices on the secondary markets go in opposite directions) in the 30-year bond since 1982! Yields at the short end of the Treasury yield curve where the Fed has more control have not (yet) moved up. The same is NOT the case in the longer-term debt paper.
Remember, especially in times of fiscal and/or financial strife, Gold and the yields on debt paper - especially longer-term debt paper - go in the SAME direction. This week has provided a stellar example of this principle. On the week, $US Gold prices are up 6.66 percent, the price of the US Treasury's 10-year bond is down 5.09 percent and the thirty-year paper has fared even worse than that.
What most followers of Gold know is that the stellar decade for the metal in US Dollar terms was the 1970s. What some of them forget is that the 1970s was also known as the (all but) "fatal decade" for US Treasury debt paper. Yields rose throughout the decade as higher and higher rates were demanded by domestic and international investors alike to compensate for the "profigate" (for the time) spending policies of the US government and the downward pressure put on the US Dollar as a result.
Last week, Fed Chairman Bernanke was quoted as saying that "our economic system is critically dependent on the free flow of credit." Of course it is, "our economic system" is a CREDIT MONEY system, its underpinnings are debt, the flip side of credit. Confidence in the money stands or falls on confidence in the debt which "supports" it and that, in turn, stands or falls on the perceived ability of the debtor to service and eventually repay the debt. Consider the amount of debt that the US Treasury is expected to "sell" this year to fund the US government AND the US banking and financial system. Consider the perceived capacity of the US economy to service this debt. We'll leave aside the question of repayment, the last time that US Treasury debt actually FELL year on year was 1969. In 1969, the TOTAL of funded US Treasury debt was about ONE THIRD of the $US 825 Billion "stimulus package" Mr Obama is promising his nation.
Every new US Dollar created by whatever means lessens the value of every existing US Dollar. Worse, as the amounts of new Dollars issued grows, they erode the facility of the US Dollar as a medium of exchange, a MONEY. The principle is the same for any credit-based money - and there is no other kind of money in circulation anywhere in the world.
The spike in US long-term Treasury interest rates this week is ominous in the EXTREME! It is literally not possible for the rest of the world to "buy" the quantity of new debt proposed by the Treasury even if ALL global savings were marshalled for the task. The quantity of such savings would not buy more than 30 percent of it. This points with deadly accuracy towards a situation in which the Treasury, in order to sell the debt, is going to have to offer a higher rate of interest to potential buyers to offset the rapidly growing risk of holding the paper. The same thing happened in the 1970s, but the fiscal, financial and economic situation of the US in 2009 is VASTLY worse than it was in those days.
As the amount of Mr Obama's "stimulus package" is revealed and as more and ever more bailouts are deemed "required" by those so desperate to keep the financial system and debt-based monetary system standing upright, the pressure on interest rates in the US and everywhere else will grow. As the HUGE spike in Treasury yields at the longer-end this week make perfectly plain, the process has already begun.
Gold has simply done what it always does in times of growing doubt and fear over the future purchasing power of what is issued by governments as "money". It has risen in terms of that same "money". In $US terms, Gold rose sharply this week. In terms of the Euro, the Aussie and Kiwi Dollars, the British Pound, the Russian Rouble and MANY other global currencies, Gold hit new all time highs on January 23.
(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. Now, with spot future Gold trading above $US 900 intraday on January 23, we are most of the way there.
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 2008, 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.
As you can see in the table, Gold in Euro and Aussie Dollar terms hit new all time highs on January 23, That was duplicated by Gold in terms of MANY other currencies. We now wait to see how much longer we must wait for plus $US 1000 Gold to be revisited.
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