Depending on which figures you accept, those from Yahoo or the Wall Street Journal, the US Treasury auctioned off somewhere between $US 126 Billion and $US 180 Billion of debt paper over the past week. The "action" on the paper Gold markets certainly showed this. Over the first three days of the week, spot future Gold in New York fell $US 24.90, closing on February 24 back below the $US 1100 level at $US 1097.20. But then, after the bulk of the new Treasury paper was safely bedded down, Gold turned around and gained $US 21.70 over the last two days of the week. For the week as a whole, the US spot future price hardly moved.
Nor did much else on US markets on the week. The Dow was down - by about 75 points. The trade-weighted US Dollar index (USDX) was also down but kept its head above the 80.00 level. US economic "growth" in the fourth quarter of 2009 was revised - upwards - from 5.7 to 5.9 percent. Most of this "growth" came in the form of replenishment of inventories. With both consumer confidence and consumer demand falling in the US, nobody - not even the economists - expects this growth spurt to last.
The US Treasury managed to offload its latest "tranche" of debt quite comfortably. Longer-term Treasury yields fell this week and the spread between two and ten-year yields backed off from the all time highs above the 2.90 percent level it had reached on February 18-19.
But for the global financial system, the fundamental problem remains the same. In early December last year, facing a rapidly rising Gold price and the absolute necessity to increase the US Treasury's debt limit, drastic measures were called for. The "sovereign debt" genie was let out of the bottle with the decision to downgrade the sovereign debt of Greece by the US based ratings agencies. That certainly knocked the Gold price on the head. But the risk was huge, and it is mounting every day that the sovereign debt position of increasing numbers of countries remains in the headlines.
To question the sovereign debt of ANY major nation is risky because it is that same sovereign debt which forms the "backing" for the country in question. There is no other backing for ANY global currency except the "full faith and credit" of the sovereign government. Since December, the US has managed to stave off any concerted global examination - at least in public - of their sovereign debt position.
The US Dollar remains the world's reserve currency. Since 1971, the sole "backing" for the US Dollar is US Treasury debt - we repeat - US Treasury DEBT. This is true for all other nations, which back their own currencies with the debt paper issued by their own governments. But on a global basis, the rest of the world holds US Treasury paper as their reserves.
The last thing that the powers that be want to see is any "doubt" being cast on the future viability of US Treasury debt paper. Since December, attention has been deflected from the fiscal position of the US government by concentrating on the fiscal position of "other" nations. Greece has figured prominently but it has not been alone. The other "PIGS" nations, Portugal, Italy and Spain, are also in the crosshairs. So, increasingly is the United Kingdom and especially Japan. This is a "holding action" by the global financial system. Look anywhere, but DON'T look at the ultimate sovereign risk nation, the US. To do that would be to bring the "backing" for the US Dollar into question and with that, the viability of the entire global system of floating fiat currencies.
But the "sovereign debt" genie is out of the bottle. It cannot be put back into the bottle. What is being demanded of the Greek government today is a course of action which the US government should have taken decades ago. The US government has not taken this course and clearly has no intention of EVER taking this course.
It is only a matter of time, how much we cannot know, before the doubts over sovereign debt spread to cover the world. Once that happens, a double dip recession will be the least of the problems faced by the US government. The major problem will be the continuing acceptability of its currency. And without the US Dollar as an "anchor", the entire global monetary sytem is literally floating in mid air. Of course, it always was.
Gold is merely biding its time.
(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 three times. The third occurrence took place this week, but only for one day. As you can see, Gold is still pointing up a $US 1120 on this chart.
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. As concerns about "sovereign risk" mount, Gold is starting to recover against a still strong US Dollar. Last week, it hit all time highs against the Euro and has risen strongly in every currency, including the US Dollar. This week, it has remained fairly flat in terms of all the currencies in the table.
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With the USDX remaining above the 80.00 level, the only currency in which Gold remains below its level in this table is now the Aussie Dollar Gold price. At current (February 26, 2010) exchange rates, it would take a Gold price of $US 1399.35 for the Aussie Gold price to equal the all time high it set on February 20, 2009.