As the last two weeks show so clearly, the $US 1000 level for Gold is a very big deal indeed. For the second week in a row, Gold has retreated in $US terms this week. And because the US Dollar is down itself this week (despite its upward bounce back above the 80 level on the USDX on June 12) - Gold has retreated still further against most other major world currencies.
It is now about two and a half months since the Fed began to actively buy US Treasuries with newly created Federal Reserve Notes (AKA US Dollars) on March 25. At that time, their plans were to "buy" $US 300 Billion worth "by September". On the latest official figures, they have gone through a bit more than half of that - about $US 160 Billion. When the Fed began its Treasury buying spree, Gold stood at just under $US 940 - having briefly traded at levels just over $US 1000 a month earlier. Today, Gold trades on the futures markets at just over $US 940.
Over the same period, the yield on US Treasury debt of maturities exceeding two years has skyrocketed. This week, the yield on 10-year paper touched 4.00 percent. In mid March, it was just over 2.50 percent. The yield on 30-year paper has blown out from 3.50 percent to 4.76 percent over the same period. Historically, the yields on this longer-term Treasury paper are still low. But the magnitude of the INCREASE in yields over the two and a bit months since late March are as severe as they were in the late 1970s.
Worse, the "rot" has continued down the yield curve to shorter maturities. Between late March and the beginning of June, the yield on Treasury two-year paper remained in a tight range betweeen 0.80 and 1.00 percent. Then, at the end of last week, all hell broke loose. Over two trading days - June 5 and 8 - the yield on two-year paper exploded upward from 0.95 to 1.41 percent. That is a rise of 46 basis points or almost FIFTY PERCENT in two days. When a "risk premium" is built into an interest rate on the secondary markets for US GOVERNMENT debt paper so suddenly and so substantially, unease over the future viability of that debt paper and the currency in which it is denominated has taken a big turn for the worse. So what did the US Dollar do over those two days? It hardly moved on the USDX. And what did Gold do? It fell $US 29.80 or 3.0 percent from just over $US 980 to just over $US 950. Gold's most recent assault on the $US 1000 level had been stopped in its tracks.
Even more interesting, Gold's latest swandive, the $US 21.30 fall on Friday, June 12, did NOT take place on US markets. On July 11, spot future Gold had risen $US 7.30 on the Comex to close at $US 962. On June 12, promptly fell back into the low $US 950s in Asia. By the time European trading got started, it had fallen into the mid/low $US 940s. In New York trading, spot future Gold traded in a fairly narrow range between $US 938 and $US 944 and closed right in the middle of that range. This is most unusual. Friday Gold sell-offs usually happen in the US, they are not "accomplished" on overseas Gold markets and a "fait accompli" handed to the US.
Market action over the past two weeks is redolent of a concerted and international effort to prop up the US Dollar, simply to buy time in the lead up to the G-8 meetings in Italy which start this weekend with the Finance Ministers and culminate on July 8-10 when the Heads of State get together. While there was a lot of noise this week about the growing impatience of US creditor nations, the central banks of those same nations bought the majority of the record $US 130 Billion of Treasuries on offer over the week.
On top of that, we have the Japanese Finance Minister (to be present at the G-8 meetings this weekend) coming out with this statement on June 12. "The US Dollar's position as the world's reserve currency isn't under threat ...Our trust in US Treasuries is absolutely unshakeable."
His might be, but few others share his trust. The huge rise in Treasury yields since mid March are all the proof of that required. And if any more is needed, consider the fact that the issue now front and centre at these G-8 meetings is now the "concrete plans" that the members have to rein in the gargantuan deficits they have been piling up to "fight" the global recession. The problem here is that there are only two menthods available - cut spending or raise taxes. Either one would immediately plunge the economy AND the financial system of the nation which tries it over the edge of a meltdown. That is why the literal printing route has been chosen. It "buys time".
The more concerted the efforts to prop up a global financial system by means of the printing press, the more fragile the system becomes. The longer any effort to address the REAL problem - the lack of a viable medium of exchange - is maintained, The more fragile the "money" becomes. The harder they try to hold DOWN Gold, the tighter the "spring" is compressed underneath it.
(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. That is, until this week. The close below $US 955 on June 9 turned the chart down.
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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