Gold Commentary - May 29, 2009

Third Time Lucky?

On the last trading day of May (May 29), the spot future Gold price in New York bolted upwards by $US 17.30 to close at $US 978.80. This is the tenth highest spot future $US Gold price ever. Gold closed above its present level on two days in February 2009 and on seven days in March 2008. On both of those previous occasions, Gold briefly traded over the $US 1000 per ounce level before falling away sharply. Now, all signs point towards a third challenge - in not much more than a year - to the $US 1000 level for Gold.

Now $US 1000 for Gold seems on the surface like a very big number indeed. But in reality, it isn't. One needs only to consider the fact that Gold got as high as $US 850 on a spot future level nearly 30 years ago in January 1980. $US 850 30 years ago equates to somewhere in the region of $US 2500 today. The surprising thing about the $US Gold price is not that it is (once again) nearly $US 1000 an ounce but that it is still below $US 1000 an ounce.

Consider the previous two run ups to $US 1000. The first one took place in February/March 2008 and came in concert with the US Dollar falling to its lowest levels ever on a trade-weighted basis. The second one came in January/February 2009 and topped at the end of an eight month period during which the US Dollar had rebounded MASSIVELY from its lows a year earlier. It also came at a time when US and world stock markets were in accelerating free fall with no bottom in sight - most of them having fallen more than 50 percent in the preceding year or so.

And now we have a third accelerating approach to that elusive $US 1000 level for Gold, this one coming not much more than three months after the previous one in late February this year. Yes, the US Dollar is falling rapidly now just as it was in March 2008. But this time, the $US is not plumbing new lows, it is barely halfway back to the lows it set in March 2008. And US and world stock markets are not plummeting as they were when Gold was revisiting the $US 1000 level in late February this year. They are instead still trying to forge higher after a MASSIVE rally which began in the second week of March this year.

When Gold hit $US 1000 in March 2008, the Fed still had an official interest rate - of 3.00 percent. When Gold revisited the $US 1000 level in February 2009, the Fed had done away with its official rate altogether - it was set at a target of between 0.00 and 0.25 percent. A month after Gold hit $US 1000 in February 2009, the Fed announced that it was going to start buying US Treasury debt paper and expected to buy $US 300 Billion worth by September. At the time, the long-term yields on US Treasuries plummeted. Today, they have soared. On March 18, the day that the Fed announced their plans to monetise Treasury debt, the 10-year Treasury yield was 2.53 percent. By May 27 it had soared to 3.72 percent. The record for the 30-year bond yield over the same period is a jump from 3.53 percent to 4.64 percent.

The State of California has collapsed with the government there facing the prospect of actually having to pare back the SIZE of government. General Motors is on the brink of following Chrysler into bankruptcy. The only way that the Fed can keep longer-term US interest rates under any semblance of control is to literally create new Federal Reserve Notes (aka US Dollars) with which to "buy" them. This they almost certainly did on May 28-29 as long-term Treasury yields plummeted. The closing of short positions on US Treasuries as the Fed stepped in to buy almost certainly added to this sudden "recovery" in US Treasuries. But a price was exacted in the form of a HUGE fall in the US Dollar and an acceleration in the upward surge of precious metals and commodity prices.

In March 2008, the US financial "authorities" were in a position where they could - in extremis - intervene in all markets. When Gold hit $US 1000 again in February this year, their ability to do this had diminished substantially, but a brand new President had just been inaugurated and the markets were disposed to go along with almost anything that he proposed. Today, the patience of the financial world in general and of US Dollar holders in particular is wearing very thin indeed.

Thus the Fed is faced with an awful choice. They can support the US Dollar at the cost of foresaking their ability to keep US market rates of interest in check. Or they can support US Treasury debt paper at the cost of standing by and watching the US Dollar plummet because of the amount of them they must create out of thin air in the process. There is no way around this dilemma.

The events which have unfolded over the last two days of this week (and of the month of May) have placed the waning "powers" of the powers that be into stark relief. The Fed has clearly decided that they will do WHATEVER is necessary to prevent (or at least postpone) a blow out in longer-term US interest rates. Treasury yields were dragged down on May 28-29 - at the cost of a plummeting US Dollar and a sharply rising US Gold (and Silver!) price.

The period of a little over a year since Gold first traded at $US 1000 in March 2008 has seen the US government and its US Central bank progressively abandon any pretense of concern for the future viability of their financial system and its underpinnings. The final nail in this coffin was the Fed's decision to begin to "monetise" Treasury debt in March. We are now fast approaching a situation in which that is all the Fed can do to hold US interest rates down. And once the Fed finds itself unable to do even this - and that time is fast approaching - the REAL global recession/depression will be on in earnest.

"Third time lucky"? We think so. The destruction of the future viability of global paper money in general and of the US Dollar in particular has reached a point where it will be difficult to the point of near impossibility for Gold not to react. Whatever happens in the immediate future, once the $US 1000 level becomes a FLOOR for the Gold "price" rather than a ceiling, the global scramble to find a viable medium of exchange will begin.

Of course it was there all the time, wasn't it?

The $US 5 x 5 Gold Point And Figure Chart:

(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.

On February 20, as you know, Gold made it all the way back to its previous all time highs. But it did NOT break through the $US 1000 barrier. Since then, Gold retreated to just below the $US 900 level in three moves down. What is being traced out on this chart is a gigantic "reverse" head and shoulders formation. The trading range between $US 900 and $US 1000 was broken early in April. Over the month of April, a tighter range between $US 870-910 was established. Over the month of May, Gold has gone straight up on this chart. Now, all that's left is the $US 1000 level.

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. On February 20, those highs were taken out when Gold hit $US 1000. Gold now only $20 below that level in US Dollar terms but this week, the US Dollar fell faster than Gold rose. Right now Gold is much closer to its all time highs in $US terms than it is in terms of any other major currency.

Gold In Four Major Currencies Since The 2006 High On the $US 5 x 5 P&F chart (see above), the May 2006 high is VERY significant. It led to the correction which anchors the uptrend line on the chart. Currency   2006 High Date   All Time High Date   Up/Down Percent US Dollar 721.50 May 11 1004.30 March 18 (08) +282.80 +39.20% Euro 560.20 May 11 796.00 Feb 20 (09) +235.80 +42.09% Aus. Dollar 928.60 May 11 1571.60 Feb 20 (09) +643.00 +69.24% Jap. Yen 79285 May 11 103233 July 17 (08) +23948 +30.20%