October has been quite a month for Gold so far. After the price dipped back below $US 1000 during and just after the G-20 meeting in Pittsburgh, the spot future closing price of Gold has soared from $US 1000.70 on October 1 to $US 1056.60 six trading days later on October 8. That's a rise of 5.6 percent. Over the same period (October 2-8), the trade weighted US Dollar index (USDX) fell from 77.41 to 76.13. That's a fall of 1.7 percent.
In percentage terms, the rise in the $US Gold price has been about 3.25 times the fall of the US Dollar so far this month. But desperate times call for desperate measures and, as the week progressed, more and more postings on the mainstream financial websites began to point out that Gold was going up ONLY in US Dollar terms. The implication was clear. Once the rest of the world is properly reassured that the GFC (Global Financial Crisis) is over, the US Dollar will rally. And when THAT happens, look out "Gold Bugs"!!
Actually, there were two other reasons given for the BIG rise on the $US Gold price this week. One was the article by Robert Fisk which appeared in the October 6 edition of the UK Independent titled The Demise Of the dollar. If you haven't yet read the article, which is all over the internet by now, here's the link.
The article deals with a plan by the Gulf oil states along with China, Russia, Japan and France to end the buying and selling of oil in terms of US Dollars. Within 24 hours, all the principals named had strenuously denied any such plan. As Mr Fisk himself pointed out, that is in itself the best indication possible that the story was accurate. We have little doubt that it is accurate. Iran stopped pricing its oil in US Dollars more than three years ago. It is obvious that US fiscal and financial policies guarantee a lower US Dollar over time. It doesn't matter whether this is the intention of the policy makers or whether they regard it as an inconvenient but inevitable side effect. As long as these policies are adhered to (and there is no indication that they will be changed anytime soon), the result is inevitable.
The other reason given for Gold's surge to new all time high US Dollar levels this week was the decision by the Reserve Bank of Australia (RBA) to raise Australian rates from a 49-year low of 3.00 percent to 3.25 percent - also on October 6. This was instantly seen by the world's mainstream financial press as the beginning of the end of the global regime of grotesquely low official interest rates. It was also seen as all but conclusive proof that the GFC is over.
The Australian Dollar did of course rise against the US Dollar this week, along with pretty well every other currency which is not "pegged" to it. And, with the RBA's rate rise this week, the Aussie Dollar is bidding to become the "other half" of the burgeoning US Dollar carry trade in which international investors are borrowing the US Dollar at low or no interest rates and converting it to "assets" denominated in currencies of nations which still HAVE an interest rate. Two of the best performers against the US Dollar this year have been the Aussie Dollar and the Brazilian Real. Aussie central bank rates are now 3.25 percent after the 0.25 percent rise of October 6. Brazilian central bank rates are 8.75 percent after having been cut by 5.00 percent since the beginning of the year.
To emphasise the point about Gold going up "only" in US Dollar terms, it is pointed out that Gold is down very substantially from its February 2009 highs in terms of Aussie Dollars and Brazilian Reals since February this year, and that the metal is actually down in terms of these two currencies over the year to date. All that is true enough, Gold is down 8.6 percent in Aussie Dollar terms and 10.6 percent in terms of the Real since the year began.
But all of this is also beside the point. For nearly 40 years, the world has operated on a monetary regime in which NO currency issued by ANY nation has any tie to Gold. The US Dollar has remained the global reserve currency with all other currencies primarily using US Dollar denominated debt instruments (we repeat - DEBT instruments) as the "reserve" behind their own currency. To "substitute" any other currency or currencies backed by nothing but "faith and credit" for the US Dollar as the world "reserve" currency would simply transfer the ability to exchange IOUs for the world's economic goods from the US to some other nation or nations.
That ability is what has brought on this crisis in the first place.
The simple fact is that Gold has now re-confirmed its nearly nine-year-old bull market in terms of US Dollars this week. Any doubt that might have remained when Gold dipped briefly back below $US 1000 at the end of September has now been squashed with the rise above $US 1050 this week. This is true even if Gold dips back below $US 1000 again in the future. The possibility certainly cannot be discounted. There were concerted efforts on October 8 and 9 by the Asian central banks to intervene in the markets to support the US Dollar. These efforts actually had some effect on October 9 when the USDX rebounded from a 14-month low of 76.13 to close for the week at 76.62. And, of course, Gold fell $US 7.70 on the day.
Richard Russell recently put the whole situation in a nutshell: "The problem - you can't save the real world with fantasy money." Precisely. A US financial advisor hit on the core of the problem too: "Gold is acting like the ultimate currency ...it's not like you can hate the Dollar and fall in love with the Euro or the Yen." Or any other paper currency backed by nothing tangible or of REAL economic value, we might add.
Take a look at the chart below. $US Gold spent nineteen months tracing out a HUGE reverse head and shoulders pattern. That pattern has now been DECISIVELY broken - to the UPSIDE. Gold did the same thing between May 2006 and September 2007. From $US 720 in May 2006 Gold fell to $US 565 by October 2006 and then spent almost a year getting back to $US 720. Once it broke above $US 720, it hit $US 1000 within six months.
This $US Gold consolidation pattern is MUCH bigger and has taken three months longer. But Gold has now broken out of it just as it did two years ago.
The fundamental point, however, is not how "high" Gold goes against the US Dollar or any other paper currency. The fundamental point is that from now on, every US Dollar which Gold rises brings us closer to the time when the long delayed debate on the fundamental issue of MONEY and the lack of it in the modern financial system can no longer be avoided. Historically, Gold has always served to bring a deluded world back to economic and financial reality. Sadly, it has that job to do again.
(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 the $US 1000 level. But it did NOT break through the $US 1000 barrier. Until this week, what had been traced out on this chart is the right shoulder of a gigantic "reverse" head and shoulders formation. But on September 16, spot future Gold CLOSED at $US 1020.20. That breaks decisively above the $US 1000 "double top" on this chart and revalidates the entire bull market - from the bottom. Late in September, had the downturn on the chart. And this week Gold burst above its September 16 high to put the final re-validatoin on the entire $US bull market.
In February 2009, spot future Gold closed above the $US 1000 level for the second time. While the close did not quite equal that of March 2008 in $US terms, it set new all time highs in terms of many other currencies - the Yen being an exception. That was because of the recovery of the US Dollar which had taken place since March 2008.
On September 11, 2009, spot future Gold closed above the $US 1000 level for the third time. But this time, even though it broke above $US 1050 this week, Gold did not get anywhere near its February 2009 highs in terms of the Aussie Dollar or the Euro and remained below it in terms of the Yen. Here's the record.
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Take a look at the percentages by which three "other" currencies remain below their levels of February this year. To take the most "extreme" example, at current (October 9, 2009) exchange rates, it would take a Gold price of $US 1423.30 for the Aussie Gold price to equal the all time high it set on February 20, 2009.