According to ex Fed Chairman Alan Greenspan, the "canary in the mine" is the quite sudden and startling rise in US Treasury yields which took place this week as (per usual) the Treasury auctioned an ocean of new debt paper. For example, between March 1 and March 23, the yield on 10-year Treasuries inched up 8 basis points from 3.60 to 3.68 percent. On March 24-25, the yield soared 20 basis points from 3.68 to 3.88 percent.
A "canary" is a luckless bird which happens to be very susceptible to the kinds of toxic gasses often found in early coal mines. The miners would take one with them in a cage to provide an "early warning" system. If the canary fell off its perch and expired at the bottom of the cage is was a warning to the miners to get out - FAST - before they shared the same fate as the bird.
In a financial equivalent of "killing two birds with one whiff of gas", while Treasury yields were storming upward on March 24-25, so was the US Dollar. Over those same two days, the trade-weighted USDX jumped from 81.11 to 82.40, the close on March 25 being its highest so far this year and indeed the highest close on the USDX since mid May 2009. Please note that more than half of the USDX is "measured" by the exchange rate of the US Dollar against the Euro. So far this year, the Euro is down against pretty well every major curency in the world except the British Pound. Over the past week, the Euro fell to $US 1.3290, its lowest level since the end of April 2009.
Interesting, isn't it. The main item pressuring the Euro since last December has been the Greek sovereign debt downgrade. This week, Portugal was added as Fitch downgraded its sovereign debt too. This has led to a blowout in Greek sovereign debt yields and the Portugese downgrade this week has already added 10-15 basis points to its sovereign debt yield. Yet when the same thing happens (admittedly not to the same extent - yet) to US Treasury debt yields, the US Dollar soars.
Why? The ubiquitous "flight to safety". It is partly knee jerk and partly computer programmed, but it is operative. Whenever there is any perceived cause for increased anxiety, especially in the US, there is another flight to US Dollars. The leap in longer-term Treasury yields this week is obviously a case of a "risk premium" starting to be built into them. The Treasury did manage to sell the debt, but the bid to cover ratio was markedly down on recent auctions and, of course, the rates necessary to clear the auctions were were markedly up. If this does not point to good case for a WEAKER US Dollar we don't know what does. But no matter how many dead birds are littering Wall Street and the currency trading floors, very few have yet noticed them.
Of course, the REAL "canary in the mine" is the $US Gold price - which fell as Treasury yields and the US Dollar rose this week. The problem is that, in stark contrast to the function of the real bird to preserve the safety of the real miners, Gold as an advance warning of FINANCIAL danger is politically managed (see our lead-in piece at the top of the page - unchanged since 1995). Gold (and silver) has been firmly placed in the category of "risky" investments, the ones investors turn to when there is a lull in the kind of dangerous news which drives them back into the US Dollar.
Once again, this is giving Gold a function which is the precise opposite to the one it has been historically enjoyed. For millenia, Gold was the form of wealth turned to when the financial system of the day was proving increasingly hazardous to one's economic health. Today, that has been turned on its head. Today, conventional wisdom tells us that Gold (and silver) are the FIRST form of investment to be dumped in times of financial or economic turmoil.
On a day to day basis, especially considering Gold's action over the past week, that has some surface plausibility. Over a longer time frame, say the eight years since Gold hit bottom just above the $US 250 level for the second time, it has none whatsoever.
Mr Greenspan's real canary in the mine is Gold, but it is a strange bird indeed. The system it warns about is being kept "alive" by artificial means so that the canary will stay on its perch and not give out the advance warning. Since December 2009, it has taken a non US sovereign debt scare campaign to keep the canary quiet. But how much longer can that last with the sudden spike in US sovereign debt yields this week?
(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.
After the initial correction, Gold has staked out an approximate $US 100 trading range between $US 1050 - $1150. On this chart, we remain right about in the middle of that range.
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 2009.
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 2009 and rose more than $US 200 almost straight up before the correction in the wake of the Greek downgrade in early December.
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Gold ended up marginally down in $US terms but up in terms of the other three currencies in the table over the week as a whole. The only currency in which Gold remains below its February 2009 level remains the Aussie Dollar Gold price. At current (March 26, 2010) exchange rates, it would take a Gold price of $US 1420.10 for the Aussie Gold price to equal the all time high it set on February 20, 2009.