It is not likely that too many people reading this headline would break our in a bout of "deja vu", but we did use in almost exactly a year ago - on February 29, 2008. On that day, spot future Gold closed at $US 975.00. This week, Gold was flirting with that same level once again.
It WAS flirting with it, that is, until Friday, February 20 when the spot future price soared $US 25.70 to close at $US 1002.20. Here's that "hurdle" again.
This is the third spot future closing price ever above the $US 1000.00 level. It comes a bit more than eleven months after Gold closed above $US 1000 for the first time ever on March 17 and 18, 2008. For the record, the three spot closes above $US - so far - have been:
The question is, of course, now what? Most of you reading this will be well aware of what happened to the $US Gold price in the wake of its sojourn to the $US 1000 level in March 2008. Gold sold off in two waves, the second one taking it from just below $US 980 in mid July to intraday lows in the $US 680 region by mid November last year. Will that happen again?
Quite a few people seem to think so, or at least their words and actions are indicating that they think so. Gold stocks, for example, are nowhere near the levels they reached when Gold was first flirting with $US 1000 in March 2008. There are at least three very good reasons for this though.
First, Gold stocks are STOCKS, not Gold. A year ago, global and US stock markets had fallen very little from the all time highs they had set, in the main, less than six months earlier in late 2007. Stock investors, all stock investors not just Gold stock investors, were still thinking "up", not "down". Today, stock markets around the world have been decimated. On February 20, 2009, the Dow closed at a new bear market low of 7365. This is decisively below the previous bear market low set in November last year and uncomfortably close to the post 1995 low of 7286 set way back in October 2002.
People are not inclined to hold any kind of "paper" at present. On top of that, they are fearful of buying or holding stocks (any stocks) in a market which is on the verge of tipping into a new and quite possibly even steeper leg of its bear market.
The second reason why Gold stocks are "lagging" is simply that when Gold hit $US 1000 in March 2008, it was at levels it had never reached before. Today, Gold is regaining OLD LEVELS. In any sector of any stock market, there is a marked increase in buying "reticence" when the sector is testing old highs, especially old all time highs. There is always great worry that the same thing will happen again from the same level. Last time Gold hit $US 1000, it "tanked" and Gold stocks got slaughtered. Maybe it will happen again. That is what is being thought amongst many if not most Gold stock holders/traders. Hence the "underperformance" of the stocks vs the metal.
Third, times are very tough out there and there is still a lot of "deleveraging" and retreating into cash or its equivalent taking place as people face onerous servicing costs for existing loans and the growing prospect of lower income (or no employment income at all) with which to go on making ends meet. It is an historically proven fact that when faced with a number of different choices of financial assets to sell to raise money, most people sell "from the top". That is, they sell their best performing assets first and hang onto their losers. Despite the fact that Gold stocks have "underperformed" the metal, they have surely outperformed pretty well every other class of stock. Hence the great temptation to sell them.
There are many other reasons why Gold stocks have "underperformed" Gold, but these three should be sufficient. In light of all this, it is quite hilarious to read several "mainstream" investment sites all speculating about Gold being the next investment "bubble". Gold stocks "should" be outperforming Gold. They're not. Therefore Gold at $US 1000 is a bubble.
Is it indeed? Amongst the many factors which have not been considered in jumping to this convenient conclusion is one which stands out. We, and several other writers on Gold and the political economy, have for weeks been pointing out that Gold has already reached (and far surpassed in many cases) all time highs in terms of just about every major currency in the world - EXCEPT the US Dollar (and the Japanese Yen and currencies still "fixed" to the US Dollar). We never saw a word about a Gold bubble when Gold was soaring to new highs in terms of Aussie/Kiwi/Canadian Dollars, Euros, British Pounds and literally dozens of other currencies.
The fact is that when Gold topped the $US 1000 mark for the first time ever back on March 17, 2008, the $US Index (USDX) closed at an all time low of 71.30. On February 20, 2009, when Gold again topped $US 1000, the USDX closed at 86.70 points. On a trade weighted basis, Gold has not moved while the US Dollar is up 21.6 percent. Which one is the "bubble"?
For now, Gold has merely regained the ground it has lost over the past year in US Dollar terms despite a HUGE rise in the US Dollar itself as the demand for Dollars has soared to deleverage (pay down or pay off debt) and/or to retreat to what is STILL regarded by most as the ultimate "safe haven" - US Treasury debt paper. It is impossible to know in advance if Gold will stage another retreat from $US 1000, and if it does, how long that retreat will last and how low it will go. It is certain that the monetary and banking powers that be both inside and outside the US will do whatever they can to bring about such an outcome.
In the meantime, every new spot future Gold close above the $US 1000 level piles even more danger on top of what is already an exceedingly dangerous situation in the global markets for paper assets - all paper assets up to and including the paper currencies themselves. This is what we had to say about the subject when Gold was threatening $US 1000 for the first time at the end of February last year:
"It is impossible to say how much resistance Gold will hit when it reaches or marginally exceeds the $US 1000 level for the first time. We don't even know whether there will be any resistance at all. Gold might knife straight through the $US 1000 level and accelerate still further. But historically, that has seldom happened with any investment vehicle. We would be surprised if Gold does not hit some "heavy weather" at or about the $US 1000 level."
With the benefit of a year of hindsight, that is of course exactly what happened. It is not nearly as likely to happen this time. The global financial crisis is a year older, very much worse, and perceived to be very much worse than it was a year ago. With the frantic pumping out of new paper money borrowed into existence out of thin air, disquiet is growing fast about the viability of ALL forms of paper "wealth".
The point is that when Gold DOES consolidate above $US 1000, whether that happens next week or six months from now, it will have jumped the "last hurdle" and broken through its final ceiling. The world has been used to looking at a $US Dollar Gold "price" in triple digits for about 35 years. Once the novelty of looking at a $US Gold price in FOUR figures wears off, and it won't take long if Gold keeps going up from here, the entire angle of view will change. From looking up towards a "ceiling" of $US 1000, the perception will be that the "floor" is $US 1000. Once a new "floor" is in place in ANY investment, actual and potential investors only look in one direction. Straight up.
(Chart appears here in original analysis)
A new low was hit on the chart when spot future Gold closed in New York at $US 705 on November 13 last year. 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 last year.
And now, as you know, Gold has made it all the way back to its previous all time highs. If the $US price is going to explode, then Gold will continue to go straight up next week. A spot future closing price of $US 1025 or higher on this chart would be a signal that the next leg of the bull market is OFF. Conversely, a turn here (a spot future close of $US 975 or lower) would signal a longer wait. Gold's movement from its present level is critical.
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 30 with situation being duplicated by Gold in terms of MANY other currencies. This week, Gold almost duplicated its all time high in Aussie Dollar terms and went on to set another all time high in terms of the Euro. 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. And Gold is now teetering on the brink in $US terms.
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