Last week, our title for this page was Third Time Lucky?. Not yet. Gold did make it as high as $US 987 intraday this week, but that was before June 5 and the latest report on US employment. AS you no doubt know by now, spot future Gold fell almost $US 20 on the day, thereby giving us our first "down" week in the US Gold futures markets since the week ending on May 1 - that's over a month ago.
The week began with Treasury Secretary Geithner answering a summons to go to China and "reassure" the holders of some $US 1.5 TRILLION in US Dollar denominated assets that not only was their investment "safe" but it would retain its purchasing power. That's a tall order. Mr Geithner began with a speech at Peking University during the course of which he assured the students that their government should "let" the Chinese currency appreciate against the US Dollar. He also told them that he was in favour of a "strong Dollar" and that the Chinese holdings of US Dollar denominated "assets" were safe. The students had the bad grace to laugh at this, perhaps reflecting on the inconvenient fact that a rising Chinese currency relative to the US Dollar would mean that the value of these $US assets measured by that same Chinese currency would fall. Inconvenient facts of this nature are glossed over or simply ignored in most places in the world. Shame, for Mr Geithner, that such does not seem to be the case in China.
While Mr Geithner was striving to "reassure" his Chinese hosts, back in the US, General Motors duly filed for bankruptcy - on June 1. Is there any longer-term US market watcher out there who can imagine a situation in any previous era when such an announcement would NOT have left a smoking hole in the floor of the New York stock exchange? Not this week, the Dow was up 221 points on the day, which was almost its entire rise for the week.
And then there was the Treasury market, one major source of the angst which led to Mr Geithner's summons to China. There is no way to avoid the fact that - except for the very short (6 months or less) end of the Treasury yield curve, Treasury rates are exploding upwards. Yields on Treasury paper maturing in five years or more are up between 1.35 and 1.55 percent since the Fed announced their decision to start actively buying Treasury paper at the March 18 FOMC meeting. This week, the "rot" spread to two-year paper.
On June 4, the spread between the yield on two and ten year debt paper hit an all time high (intraday) of 2.81 percent. On March 18 when the Fed announced its plans to start monetising Treasury debt, the spread had been 1.72 percent. The next day, supposedly galvanised by a MUCH lower than expected official job loss number released by the US Labor Department, the spread narrowed sharply to 2.54 percent.
But this narrowing did not take place because the yield on 10-year Treasuries fell, but because the yield on 2-year Treasuries rose - MASSIVELY! On the day, the yield on Treasury 10-year paper rose 12 basis points to a new high for the year of 3.83 percent. The yield on Treasury 2-year paper SOARED 34 basis points to 1.29 percent - its highest level since July 11, 2008. Back then, the Fed Funds rate stood at 2.00 percent - well above the two-year Treasury yield. Today, there is no Fed Funds rate - the Fed has a "target range" of between 0.00 and 0.25 percent.
Ever since the Lehmann Brothers shock of late last year, China has been shortening the average maturity of its holdings of US Treasury paper. The utter blow out in shorter-term Treasury yields on June 5 saw the "value" of two-year Treasuries fall $US 6.56 per $US 1000 face amount - IN ONE DAY. The "blushes" of foreign holders of US Treasuries was saved on the day, however, since the $US index (the USDX) rose by 1.28 points on the same day. Why did this happen?
It happened because on that same day, June 5, the US Labor Department strode to the fore with their announcement for official US employment statistics for May. They announced that over the month, US payrolls had contracted by 345,000 while the official US unemployment rate was UP by 0.5 percent to 9.4 percent - its highest level in 26 years.
As is their wont, US markets focussed on the job loss number and ignored the actual unemployment rate. Boy, did they FOCUS. As is normal, in the lead up to the Labor Department announcement, Bloomberg surveyed 76 US economists as to their estimates for the job loss number for May. Their median (half above, half below) guess was 520,000. The actual OFFICIAL number was 345,000! Eureka. The US Dollar soared, the rolling thunder that "the worst is over" reached a new crescendo. And, of course, the "players" on the futures markets lost no time in bailing out of their Gold (and Silver) long positions.
How could layoffs come in almost 180,000 BELOW "market expectations" while at the same time the unemployment rate rose by 0.5 percent - 0.2 percent ABOVE market expectations? The answer is, of course, that in the REAL world, such an outcome is completely impossible. But in the world of government statistics, there's no problem. One just ramps up the use of what is known as the "birth-death model".
Think for a second about how most trading is done in large firms on US (and most other world) paper markets. There is very little human judgement employed. Most trading strategies are literally programmed into computers. And among other things, these computer programs are very "receptive" to official government statistics. When a particular statistic is fed into the machine which is wildly at varience with what it was programmed to "expect", strange things happen. They certainly did on June 5.
A computer cannot be swayed by any amount of financial "spin". But at the same time it cannot exercise judgement regarding that "spin". It simply works with the numbers that are fed into it in the manner in which it has been programmed to function. Traders CAN exercise judgement but nowadays, most of them prefer not to. In the US in particular, the latest item of faith is that the worst is over for the recession and the "green shoots" are steadily getting taller. Government statisticians are acutely aware of BOTH these factors and have no qualms about pandering to them.
As we said above, the Chinese students laughed at Mr Geithner. When the rest of the world starts doing it too, the jig is up. And it's not going to get any easier. Next week, the US Treasury faces the task of selling an all time record of almost $US 130 Billion in debt paper.
(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. Since the start May, Gold has gone straight up on this chart. The late sell-off this week has not turned this chart down. For that to happen, spot future Gold is going to have to close at $US 955.00 or lower.
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. Right now, and even with the $US Gold price fall to end the week, Gold is much closer to its all time highs in $US terms than it is in terms of any other major currency.
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