On a spot future closing basis, Gold closed on January 30 at $US 927.30. This is exactly $US 77.00 (or 7.67 percent) below the all time high of $US 1004.30 (again spot future closing basis) that Gold reached on March 18, 2008. In terms of Yen, the discrepancy is MUCH bigger. On January 30, Gold closed at Yen 83196. This is Yen 20037 (or 19.41 percent) below the Yen 103233 all time high which Gold reached on July 17, 2008.
In terms of most of the other major currencies in the world (other exceptions being the Chinese Yuan and currencies "pegged" to the US Dollar), Gold has been scaling all time highs for the past two weeks. That includes the Euro, the other potential global "reserve" currency. The reason for this is, of course, that all these currencies have been falling in exchange value against the US Dollar for the past six or seven months while the US Dollar has, in its turn, been falling against the Yen over the same period.
Gold reached its all time high in terms of US Dollars in March when the US Dollar index (USDX) hit bottom. Gold reached its all time high in terms of Yen when the commodity boom peaked in July. Why has the US Dollar and the Yen held up since then to the extent that Gold is still worth less in terms of these currencies than it was in the first half of 2008?
In terms of the Yen, the solution is simple. The Japanese government has maintained a "ZERO" interest rate policy for years now. That made its currency, the Yen, the vehicle for the global "carry trade". The mechanism was simple. Borrow Yen at a next to non-existent interest rate. Sell the Yen (thereby lowering its exchange value) for a national currency whose interest rates are comparatively high. Use the currency so obtained to purchase debt instruments denominated in that currency and enjoy the difference in yield.
Great, as long as the interest rate differential AND the relative exchange rates betweeen the respective currencies does not fluctuate too much. But deadly to one's financial health when that is no longer the case. The interest rate differentials between the Yen and the rest of the world has been decimated over the past six months or so. In the case of the US Dollar and Swiss Franc, there no longer is a differential. In the case of the favoured "other side of the carry trade" currencies, the rate differential has collapsed.
Hence the carry trade has unwound, in fits and starts it is true, since the Yen Gold price peaked last July. The unwinding means that the debt instruments bought with the borrowed Yen must be sold for the currency in which they are denominated and the proceeds must in turn be converted to Yen to repay the original loan. To do that, the Yen must be bought, hence its huge leap on currency exchange markets.
The case of the US and its Dollar is a bit more complex, but not much more. The rise in the US Dollar was ignited by a global wave of "deleveraging" - a desperate rush to reduce or eliminate debt, especially highly leveraged debt. Since the majority of this debt was denominated in US Dollars, the US being the reserve and international settlement currency, the demand for US Dollars to "deleverage" skyrocketed. This phenomenon is still going on, but it has a "use by" date which is approaching.
The other aspect of the rise of the US Dollar was a desperate surge of capital repatriation by Americans. In stark contrast to the Japanese (and the Chinese) Americans had no savings. As asset valuations plummeted, they had no choice but to sell to raise the liquid capital which they had NOT accumulated through savings. Capital repatriation is selling foreign investments, converting the money back into the home currency (in this case the US Dollar) and bringing it home to meet pressing obligations.
And there is a third factor, one which must never be forgotten. The US Dollar is still the world's RESERVE currency. The US is the only nation in the world which can buy valuable goods and services anywhere WITHOUT having first to buy the currency of the nation from which it is buying. The US Dollar is an INTERNATIONAL trading currency as well as being a RESERVE currency. Finally, there is the simple fact that the rest of the world holds predominantly US Dollars as the "reserves" which form the foundation of their own monetary system. Without these "reserves", they haven't got a system.
It is, of course, a fact that the US Dollar is rapidly losing its reserve currency status. The planned debt issuance of the US Treasury over this calendar year - estimates range from $US 2.5 to well over $US 3 TRILLION - are not supportable. The rest of the world doesn't have that kind of money to lend. If the Obama Administration carries forward its "stimulus" (and other) policies, the stark prospect of a simple "monetisation" of the debt - by means of literal US Federal Reserve purchases of it - is a certainty. The status of the US Dollar, as an international trading and reserve currency, will not survive that. The end result is that the US Dollar will plummet, if not against all other global currencies then certainly against the one form of MONEY which is no-one else's liability - Gold.
And what of the Yen? The Japanese government has long been trapped in the same predicament which the Obama Administration is now entering. Japanese rates have been ZERO for years. Japanese government deficit spending has been immense (much bigger than past US deficit spending on a per capita basis) for years. Indeed, Japanese government debts are now so high that the only reason they continue to be "serviced" is the non-existent interest rate. The Japanese government cannot afford a positive interest rate. The US government will soon be in exactly the same trap. The BIG difference is that the Japanese people have savings while Americans (despite what has happened in recent months) do not.
If you want a signal of the approaching demise of the entire global fiat debt-based money debacle, look for the point at which Gold sets new all time highs against the US Dollar and/or the Yen. At that point, the push will start in earnest for the return to a rational global monetary system. Gold will be resisted, but it cannot be overcome. It is the only rational global form of money which has ever been discovered.
(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
As you can see, that rally in the $US Gold price has continued. In December, Gold broke above the steeper of the two downtrend lines on the chart. The correction in the first half of January brought the price back to the line. Since then, Gold has gone straight up. And with its close of $US 927.30 on January 30, Gold is now back to the second and LAST downtrend line. A break above this line would signal an attack on the March 2008 $US 1000 all time high.
Gold has already set new highs this year against most major (and minor) world currencies.
We began the table below in 2007 and have extended it into 2009, even though Gold in all four currencies in the table remain well above their 2006 highs. The all time highs for Gold which occurred in 2008 have remained intact in US Dollars and in Yen.
But in terms of the Euro and especially the Aussie Dollar, the situation is very different. Gold hit new all time highs in both currencies on January 23 and those levels have been further raised this week. This situation is being duplicated by Gold in terms of MANY other currencies. In fact, the Japanese Yen and the US Dollar (and currencies still "pegged" to the US Dollar) are about the only paper moneys left against which Gold has NOT (yet) hit an all time high this year.
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