With the exception of a short-lived aberration a couple of weeks ago in the lead up to the G-8 Finance Ministers' meeting and when the US Treasury was selling off a weekly record $US 130 Billion in new debt paper, the world has been getting more and more publicly "dissatisfied" with the status of the US Dollar ever since the start of this year. And a growing number of nations, the most vocal of which have been Russia and China, are not holding back about it.
Last week we had the "SCO" (Shanghai Cooperation Organisation) meeting immediately followed by the "BRIC" (Brasil, Russia, India, China) summit in Russia. Russia and China are members of both organisations. India is, of course, part of BRIC and is moving slowly but surely towards upping their present SCO status from "observer" to full member. The BRIC countries alone have 15 percent of the world economy and 40 percent of the world's currency reserves, not to mention about half of the world's population. They are, to put it mildly, fed up with exchanging actual and valuable economic goods in return for US Treasury and Fed emitted IOUs - otherwise known as US Treasury debt paper and US Dollars.
Once again this week, the Chinese have called for a "multi-polar" world reserve currency "delinked from sovereign nations". The BRIC nations (notably China and Brazil) have already set up large barter trades between each other where goods are exchanged without the use of money at all. China has already set up "swap" deals all over the world where trade is carried out, especially in raw resources, without the use of US Dollars. Russia has proposed selling Treasuries and buying the "sovereign debt" of the other BRIC nations - if they will reciprocate in kind.
And, of course, Gold keeps raising its pesky head on the periphery of all these discussions. Yet again this week, a "senior researcher" in the Chinese Communist Party piped up: "Should we buy Gold or US Treasuries? The US is printing dollars on a massive scale and in view of that trend, according to the laws of economics, there is no doubt that the dollar will fall. So Gold should be the better choice." There is an old saying in the debate about "ideologies" - "Just because Stalin says the sun rises in the east doesn't mean it isn't true." Piquant, though, is it not, that this statement comes from the last "Communist Party" with any influence left on earth today.
Nor is the debate being confined to the last holdouts of "Communism" and to countries which were up until very recently known as "developing nations" or, in less polite circles, as economic and financial "basket cases". The Canadian magazing Macleans recently published an article titled: "Can They Pay It Back?". Of course there was no need to identify the "they" in the title, anyone reading it instantly (and correctly) assumed that the entity in question was the US. While no definitive answer to the question was reached inside the body of the article, there was a lot of evidence presented all leading to only one possible conclusion. NO - "THEY" CAN'T!
Unless, of course, they "pay it back" with MASSIVELY devalued Dollars, which is how all but a handful of nations have repaid massive debts throughout history. Not that the US Dollar hasn't been massively devalued already. Forty years ago, there were certain financial entities (foreign governments and central banks) which could still exchange $US 35 for one troy ounce of Gold. Today, anyone can "buy" Gold. The problem is that it takes $US 940 to buy that same troy ounce. It takes almost 27 times as many US Dollars to buy an ounce of Gold today as it did in 1971. And 1971 isn't very long ago.
Turn the situation "inside out" and look at the US Treasury's "funded debt" and you will instantly perceive a very good reason for this massive US Dollar devaluation. In 1971, the Treasury's "funded debt" was $US 400 Billion. Today it is $US 11,400 Billion. That's a blow-out of 28.5 times in the funded debt over the same period, a fairly close match to the 27-fold rise in the US Dollar Gold "price". Just as an aside, a 28.5-fold rise of the US Gold price - to match the US Treasury funded debt blow-out - would give a Gold "price" of $US 997.50. The $US Gold price has actually reached at or about that level four times in not much more than the past year - in March 2008, July 2008, February 2009 and May 2009.
And remember, we are not counting here the Treasury's "unfunded debts" - political promises which it has made but has NOT funded. A recent estimate put these at $US 99,000 Billion.
In May 2006, Gold reached $US 720 per ounce, almost the same price it had reached in September 1980 in its "backside" rally after falling from $US 850 to about $US 480 between January and March 1980. That $US 720 level reached in May 2006 led to the first major correction in the current Gold bull market. It took Gold until Septmeber 2007 - that's 16 months - to regain the $US 720 level. Six months later in March 2008 Gold hit the $US 1000 level for the first time ever.
And that led to the second major Gold correction in US Dollar terms. The difference with the current correction is that Gold has repeatedly advanced back to (or very near) its previous highs - it did not do that during the 2006-07 correction. Last month, Gold actually regained the US 1000 level - for one day. Now - fifteen months after first hitting $US 1000 in March 2008 - Gold stands just above the $US 940 level. The first major Gold correction took 16 months to resolve. This one has taken 15 months - and counting.
There is, of course, one other major difference. In the 2006-07 Gold correction, paper assets of all descriptions were still booming. This time, and despite the stock market recovery since March this year, the opposite is the case. The "monetary mess" has not changed but the reaction to it on the paper markets certainly has. The reaction of governments and central bankers has not changed, it has merely intensified, to a level which was not seen as imaginable up until less than a year ago.
(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 last week. The close below $US 955 on June 9 turned the chart down. With the fall below $US 925 at the beginning of this week, the downswing had retraced about half of the previous rise. Now, with Gold just above $US 940, a close of $US 950 or higher is required to cause an upturn on this chart. On June 26, the intraday high on the spot futures market was $US 947.90.
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. They were not taken out when Gold hit $US 1000 again in May. Right now, Gold in US Dollar terms is much closer to its all time highs than it is in terms of any other major currency..
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