With due deference to our title here last week - The Calm Before Something Happens
What "happened" was, of course, the Massachusetts Senate election and the ousting of the incumbent Democrat. All of a sudden, the Democrats don't control the agenda in the US Congress any more. We go into this in greater detail in the Late January 2010 issue of The Privateer - published on January 24.
If there was ever an example of the old market adage - "buy on rumour, sell on fact" - it was the market action in the lead up to and in the aftermath of the election. On January 19, the day of the election, almost everything was up on US markets. Precious metals were up, the stock market hit new rally highs and the US Dollar was up.
Then, the votes were tallied after the markets closed on January 19. The next day, precious metals swooned with Gold falling $US 27.40 and the Dow came off over 100 points. The only thing to go up on the day was the US Dollar, which bolted almost 100 basis points higher on the trade-weighted USDX. For the rest of the week, commodities and precious metals continued to fall despite the US Dollar not going on with its rise while US and world stock markets fell away.
The great upwelling of global uncertainty came from the two major nations of the world. China, which is striving mightily to provide the "growth". And the US, which is still providing (through borrowing, not least from China) most of the "money". China announced that it was banning any more major bank lending for (at least) the rest of January. And the White House went into frantic action in the wake of the Senate defeat.
The "markets" do what they always do when uncertainty increases, they retreated to what they perceive as "safety". "Safety" is programmed into computers, and into most large traders, as government debt instruments. Hence the falling away of the "speculative" sectors, precious metals being firmly placed in this category by both the computers and their programmers.
In fact, what happened after January 19 this week looks eerily like what happened after the GFC hit crisis maximum in September/October 2008. Back then, the US Dollar rallied hugely and commodities and precious metals swooned in a huge global deleveraging. So far this time, the US Dollar has not gone on with its big rally of January 20, but stock markets and commodities continued to fall throughout the week.
So, with its close of $US 1089.70 on January 22, Gold is back (just) below the level at which it began 2010 and is close to the first correction low of $US 1086.70 it set exactly a month ago on December 22. Meanwhile, the US government has broken out into a frenzied burst of "activity" in an attempt to reassure the public that "something" is going to get done. That is a perfect recipe for the opposite to happen. Between now and the end of January, there is a FANTASTIC backlog of Congressional action that simply MUST be completed. Not the least of that is another rise in the Treasury's debt "limit".
We do not know how low the $US Gold price will go this time. We do know that the lower it goes, the better bargain it is.
(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 2008. 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 in 2008.
By February 20, 2009, Gold had made it all the way back to the $US 1000 level. But it did NOT break through the $US 1000 barrier. Instead, what was traced out on this chart was the right shoulder of a gigantic "reverse" head and shoulders formation. Then Gold made it back to $US 1000 and on September 16, 2009, closed at $US 1020.20. That broke decisively above the $US 1000 "double top" on this chart and revalidated the entire bull market - from the bottom. In just over two months, from the end of September to early December 2009, Gold soared from $US 1000 to $US 1218. The subsequent and inevitable correction has seen the spot future closing price dip below $US 1100 twice, the second ocurrence coming this week.
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, in mid January 2010, Gold is marking time in the low - mid $US 1100 range.
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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" since early December. The most "extreme" example remains the Aussie Dollar Gold price. at current (January 22, 2010) exchange rates, it would take a Gold price of $US 1418.70 for the Aussie Gold price to equal the all time high it set on February 20, 2009.