Last week it was The Dubai Stumble, when Dubai announced it was asking for a moratorium on debt payment and Gold gyrated $US 60 in intraday trading in New York. Last Friday, the spot future Gold price closed about $US 45 above its low for the day. And Dubai fizzled out very quickly as a situation affecting global markets.
This week, the "Friday follies" were different. Before trading opened for the day, the US Commerce Department that only 11,000 jobs had been lost in November (the best result since 2007) and that official US unemployment had dropped 0.2 percent from 10.2 percent to 10 percent. The reaction was instantaneous. Gold got clobbered and the US Dollar trade-weighted index (USDX) staged a massive turnaround.
On the day, the spot future Gold price fell $US 48.60 or 4 percent, its biggest one day percentage fall since March 2008 - when it corrected from the $US 1000 level for the first time. And in sharp contrast to last Friday, the spot future Gold price closed a mere $US 0.50 above its intraday low on December 4. Ironically enough, Gold's fall on the week was a mere $US 4.70
Before the markets had stopped trading on December 4, "analysts" were saying that Gold had hit its high for the year and that the Gold "bubble" had well and truly broken. They were pretty well unanimous as to WHY this had happened. The surprise US jobs figure had spooked traders out of the "risky" end of the market and back into the "safety" of the US Dollar. The reason why this happened was an increased expectation that Mr Bernanke and the Fed might just raise official US rates sooner than had been anticipated.
Please remember that, as usual, this is "paper Gold" we are talking about. If there was a huge rush by people scrambling to exchange their physical Gold for US Dollars - or any other paper currency for that matter - it was not reported.
On December 3, Reuters published an article titled Investors taking contradictory path with gold. According to the author, Mr Jeremy Gaunt, "Gold's near vertical rise to new records is starting to puzzle many investors.". The Gold rising US Dollar falling argument no longer works since Gold had been precipitously rising against ALL paper currencies before the sell-off on December 4. The argument about people feeling more confident with "tangible assets" was trotted out, but it was also pointed out that Gold was dumped along with everything else in late 2008 when everybody rushed into US Dollars.
The lack of confidence in "money" was looked at. But Mr Gaunt pointed out that there was no sign of (price) "inflation" in the US or the developed world. The IMF's four year projection for price "inflation" is 1.7 percent annually, extremely low by historical standards.
All of this was trotted out in order to get to the last two words of the article: "Bubble, anyone?"
This is hilarious. Earlier in the piece, it is pointed out that $US Gold is not really at a high at all because its "inflation adjusted" high of January 1980 is actually $US 2150 in terms of today's Dollar. The Dow's "high" of January 1980 was about 880. Using the same comparison, the equivalent today would be about 1545. The Dow is actually at just under 10400. Which one is the "bubble"?
Never mind. By the criteria of conventional market analysis Gold is clearly "too high" and its momentum of the last two months was redolent of a market which is ripe for a correction. And as long as the Gold "price" is predominantly set on the futures markets where contracts can be bought and sold for paper Dollars there will be days like Friday, December 4.
In these days of rampant REAL inflation and unprecented government borrowing and economic intervention, Gold is simply a necessary form of financial protection. As we have said here many, many times, Gold should NOT be looked on primarily as an investment but as a form of financial insurance. It has proved its worth in this manner for thousands of years and has once again been proving it ever since the twin $US bottoms of 1999 - 2001.
It is vastly smarter, safer and easier on the psyche to simply buy the stuff and hold it. Traders, especially margin traders, got their heads handed to them on December 4. Long term Gold holders hardly even noticed. They have a nearly nine year bull market to rely upon. On top of that, they have the carnage in paper money which the interventions and the interest rate manipulations of the past decade in general and two plus years in particular make certain.
All of a sudden, Gold is 4 percent "cheaper". It will be interesting to see what the Chinese do.
(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, only to see Gold burst above its September 16 high to put the final re-validation on the entire $US bull market in early October. And this week, Gold has risen to just short of $US 1190.
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. It has remained above the $US 1000 level continually since the end of September and rose more than $US 200 almost straight up before the December 4, correction.
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Gold priced in Japanese Yen has joined $US Gold in the plus column. And the Euro would have joined it too had it not been for the big sell-off of December 4. The most "extreme" example remains the Aussie Dollar Gold price. at current (December 4, 2009) exchange rates, it would take a Gold price of $US 1432.10 for the Aussie Gold price to equal the all time high it set on February 20, 2009.