The charts and data on this page and throughout GTW (Gold This Week) have all been updated to the close of trade in the US on Christmas Eve - December 24
A very MERRY CHRISTMAS to you all. The regular weekly commentary appears below, delayed until December 26 - in Australia
On December 4, as the spot future Gold price was plummeting almost $US 50 from the all time high just above $US 1218 it had set the day before, the US Congressional Budget Office reported official Treasury borrowing for the first two months (October and November) of fiscal 2010. The total was $US 292 Billion, handily beating the all time record for the all time high set over the first two months of fiscal 2009.
On November 30, the Treasury reported its "debt to the penny" total at $US 12.113 TRILLION - a number which actually exceeded the debt "limit" by $US 9 Billion. As December wore on, it became clear that a rise in the Treasury's debt limit was becoming vitally necessary.
On December 10, US House Speaker Nancy Pelosi announced that the Treasury debt limit increase would be "attached to a military spending and appropriations bill. The figure for the limit increase was $US 1.8 to 1.9 TRILLION. This would have been by far the biggest single increase in the Treasury debt limit ever, an amount which was expected to last the US government until the mid-term elections of November 2010 were out if the way.
That didn't happen.
The US House of Reps voted on the military/expropriations bill on December 16. It did include an increase in the Treasury's debt limit, but on of only $US 290 Billion (slightly less than the Treasury borrowed in October/November). That vote just squeaked through on a count of 218-214. The amount of the limit increase was so drastically scaled down because members on BOTH sides of the house had threatened to vote down the entire bill unless there were specific commitments in the bill to increase what they called "fiscal responsibility".
So, the bill squeaked past the House. In the Senate, it was passed by exactly the 60 vote "supermajority" required on Christmas eve in what was the first December 24 session in the US Senate since 1895. Hence, the new Treasury debt "limit" will be $US 12.394 TRILLION which is expected to last until mid February next year. Clearly, the debate has not been averted as the Democrat leadership wanted, it has merely been postponed for a few weeks.
Meanwhile, as the $US Gold price was sliding towards and then below the $US 1100 level, the "spread" between short and long-term Treasury yields began to blow out in earnest. By December 22, the spread between yields on two and ten-year Treasury paper had reached an all time high of 2.85 percent. On December 24, trading closed for the Christmas break with the two-ten year yield spread hovering at 2.84 percent.
So, with a very modest rise in the debt "limit" under their belts and longer-term yields accelerating upwards, the US Treasury embarks on a year-end debt auction extravaganza next week. Between December 28 - 30, the Treasury will auction $US 118 Billion in two, five and seven-year paper next week. Right now, VERY short-term (one, three and six-month) Treasury yields are locked down by the Fed's zero percent rate policy which is now entering its second year. Longer-term yields, especially two years and up, are soaring. Hence the steepening yield curve.
The conventional explanation for this is that a steepening yield curve is an omnipresent and reliable indicator of economic "recovery". The rationale is that as "risk appetite" improves, so does the demand for longer-term paper at the expense of shorter-term paper with the result that the yield on the longer-term paper advances faster.
Of course, nobody making these conventional explanations could dream of a situation in which the viability of Treasury paper might actually become suspect. Nor would any of them give the time of day to any notion of a "risk premium" creeping into longer-term debt. Yet as the viability of the debt is questioned, the "risk premium" will rise inexorably.
As you know, Gold had a slight comeback in trading just before Christmas, breaking back above the $1100 mark during the shortened Christmas eve trading session. At its current level, however, it is still well over $US 100 below where it was three weeks ago.
It will be interesting to see what happens to Treasury yields during next week's auctions. It will be even more interesting to see what happens to them in February next year when the US government must once again take up the question of a BIG rise in their Treasury's debt "limit".
Remember, in all REALLY major Gold bull markets, the $US Gold price and Treasuary yields (especially at the longer-term end) go up in tandem. We have not really seen that happen yet in this bull market, even though 2009 will mark the ninth straight year during which $US Gold prices have risen.
(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. The correction over the past three weeks, which has given up a bit more than half half the gains since then, does not change that fact.
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. Now, three weeks later, a bit more than half that rise has been given back.
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Gold priced in Japanese Yen has joined $US Gold in the plus column. After getting into the plus column as the $US Gold price peaked, the Euro Gold price has slipped back into the "red" week. The most "extreme" example remains the Aussie Dollar Gold price. at current (December 18, 2009) exchange rates, it would take a Gold price of $US 1394.65 for the Aussie Gold price to equal the all time high it set on February 20, 2009.