You wouldn't think it, considering the global angst over its plummeting price on February 4-5, but Gold was "only" down $US 30.20 for the week. Of course, the fact that the price rose $US 34.30 on the US futures markets on February 1-2 doesn't help much. We can certainly say two things after the financial adventures that closed the week. Pretty well everything (most certainly including precious metals) is getting more "volatile". And in the precious metals markets, as in all the other markets, paper still "rules".
Which paper? The paper upon which the global financial system still depends, the paper denominated in US Dollars. It is obvious that the sudden dive in global markets on February 4-5 was symptomatic of an abrupt about face in the global carry trade. The rise of the US Dollar against everything - except its rival as the currency of choice for the carry trade, the Japanese Yen - makes that clear enough. Over the three days February 3-5, the trade-weighted US Dollar index (USDX) jumped 1.41 points or 1.8 percent and got back above the 80.00 level for the first time since July 14, 2009. Back then, the spot Gold future price was $US 922.80.
Indeed, the USDX would have enjoyed an even bigger jump if one of the six currencies used to calculate it had not been the Japanese Yen. But the real spike on the US Dollar came against the Euro, which is 57.6 percent of the USDX all by itself. There were falls in the "commodity currencies" too, of course, the Aussie Dollar being a case in point. But the Aussie Dollar is not included in the USDX.
So why the big US Dollar jump against the Euro? Quite simply because the Global Financial Crisis has come back, but this time, it is not the risk of banks going under - it is the risk of "sovereign nations" going under. Which sovereign nations? European ones, or more precisely peripheral European ones along the shore of the Mediterranean sea.
Go back to Thanksgiving 2009 in the US when it was suddenly announced that Dubai was in bad debt trouble. That bit of news led to a one day fall in Gold on its way to its December 3 high spot future close of $US 1218. On December 4, the US commerce department released a better than expected November jobs report. Gold was clobbered, falling $US 48.80 on the day (almost exactly the same amount it fell on February 4). But just to make sure that this time the downtrend had legs, Fitch downgraded Greek Sovereign debt on December 8. And this time, Gold didn't rebound as it had after the Dubai incident.
Why was this "necessary"? After all, it is a very risky thing to call into doubt the credit-worthiness of a sovereign nation or a group of them at a time when EVERY nation is borrowing and spending like never before in the global paper money era which began in 1971. As always, the best way to answer the question is NOT to look where everybody wants you to look but to look at the seat of governance of the global system. Keep your eyes firmly fixed on Washington DC - with an occasional glance at Wall Street.
The one constant which has been going on ever since the Dubai debt scare suddenly sprang into the headlines in late November in the wrangling in the US Congress over the debt "limit" of the US Treasury. This was supposed to be easy. The Democrats wanted a simple $US 1.6 to $US 1.8 TRILLION increase. They didn't get it. Instead, the US Senate had to sit on Christmas Eve last year to raise the limit by $US 290 Billion, an amount that was predicted to last until "mid February" at the time.
On January 28, after the Massachusetts election but BEFORE the Democrats had lost their 60 seat majority in the US "upper house", the US Senate voted again on the debt limit. This time, they voted by a 60-30 majority to raise it by $US 1.9 TRILLION more. The House duly rubber stamped this on February 4 - as Gold was falling $US 49.00 on the futures markets. It now awaits being signed into law by President Obama. He will undoubtedly do so this weekend. He'd better, the US Treasury plans to auction $US 81 Billion in new paper next week, yet another weekly record.
Why is Greece in trouble? Because of the huge cost increase in issuing their new debt which has come about as an anticipated result of the US ratings agencies' downgrades. What would be the situation of any nation on earth, including the US, of such an increase in debt servicing costs? Precisely the one that Greece is in. It's not rocket science.
What we are witnessing is another "deleveraging" rally, just like the one we saw in the wake of the Lehman debacle in late 2008. The peripheral European nations are in the spotlight this time, with feverish speculation that the situation will engulf the whole of Europe and threaten the continued existence of the EU and the Euro. Meanwhile, over less than eight weeks, the US government has given itself permission to borrow (and spend) an additional $US 2.2 TRILLION. Piquant, isn't it
The situation has not changed at all. What has changed is the speed with which the financial community is waking up to it. That speed has increased. This week, it was the same old herd reaction. Get out of trades - ANY trades - that were going to strangle the holder of same, most of them financed with US Dollars. Grab the proceeds and convert them back to US Dollars. Stuff the Dollars under the mattress or into Treasuries. They won't let THEM go belly up, will they?
Global physical Gold produtction has been steadily declining ever since 2001. The same cannot be said for opportunities to trade paper Gold. Remember, Gold is not primarily an "investment", it is the ultimate form of financial insurance. When that insurance is needed, and it will be, paper is NOT a substitute.
(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 last week and continuing lower 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, as concerns about "sovereign risk" mount, Gold is back down to just above $US 1050 against a considerably stronger US Dollar.
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After the big currency moves this week, the Japanese Yen is the only major currency that still shows a gain on the US Dollar since the start of the year. As a result, the Yen Gold price in the table is back (just) in the "minus" column. The Euro Gold price was in the plus column, before the big Gold price dive of February 4. The most "extreme" example remains the Aussie Dollar Gold price. at current (February 5, 2010) exchange rates, it would take a Gold price of $US 1359.90 for the Aussie Gold price to equal the all time high it set on February 20, 2009.