"Gold is out there doing something different to the rest of the commodity group"
That was Mr Bernanke's contribution, in response to a question posed by a member of the US House Budget Committee on June 9. The previous day, the spot future Gold price had closed at a new all time high of $US 1245.60, marginally beating its $US 1243.10 close just under a month ago on May 12. Two new $US all time Gold all time highs in a month (with a shallow correction in between) is a lot. It was noticed even in the US Congress.
Of course, Mr Bernanke knows why Gold is going up - so, in all likelihood, does the person who asked the question. Equally naturally, he doesn't want to say so. So he makes the point that "other commodities" (priced in US Dollars) have fallen quite severely over the time when Gold was making all these pesky highs. That was good enough for the Budget Committee who quickly dropped the subject. It's not that Gold IS different, it's that it is doing something different. Why? Search Mr Bernanke.
Bloomberg, who quoted Mr Bernanke on this issue, went on to point out in their article that commodities like steel, cattle hides, tallow and burlap plunged 57 percent in May in $US terms. Of course, the $US rose strongly in May and Gold even more strongly. Is there a difference here? Yes there is. The US Dollar is the world's currency by fiat or law and Gold is history's currency by CHOICE. Right now, both are going up and down with each other as the investment world skitters between risk and "risk free" investment vehicles. Pretty well ever since Gold was decoupled from the US Dollar (and all other paper currencies) way back in 1971, the monetary powers that be have pointed out how "risky" the stuff is. The problem is that this "risky" asset has an unbroken bull run against the US Dollar which is approaching a decade in length. The more immediate problem is that the new attitude of the investment world is that Gold (along with the US Dollar and US and German government debt) are the only low-risk assets left.
Mr Bernanke has not got the hang of being head Fed. He has never learned to speak in tongues - something that his predecesser Mr Greenspan brought to a fine art. As a result, he doesn't get "interpreted" in the financial press anything like as much as Mr Greenspan did. About all that has been offered in regard to his comment on Gold was that Mr Bernanke was dispelling the argument that people are out there buying Gold because of the threat of inflation. Is that so?
Even now, not many people are buying Gold. But those who are clearly have come to the realisation that paper money cannot be trusted because those who print or borrow it into existence cannot be trusted to stop before they render it down to the "value" of the paper it is. Inflation is an increase in the total "stock" of money. Who in their right mind could fail to see that governments everywhere have been inflating to an extent never approached in history over the course of the GFC?
Why are (most) prices not rising? Because we have reached the point where it is ONLY government doing the inflating. The "private sector" in most nations has stopped borrowing, cutting off a massive channel by which new "money" used to be lent into existence. It is this refusal of the private sector to borrow which has now elevated the GFC to "sovereign debt crisis" levels. And now, at least in Europe, governments are starting to at least talk about stopping before they all go stony broke
The US government is talking about it too, but they are not acting. The problem is that it is the US government which still controls the foundation of the global system, the US Dollar. Gold (and silver), in this context, is the only way to protect oneself from an increasingly likely breakdown in the system - WHILE STILL RETAINING A "COMMODITY" WHICH HAS AN HISTORICALLY PROVEN ROLE AS A MEDIUM OF EXCHANGE. That is why it is going up while "commodities" are going down.
Those who are buying Gold know that. Mr Bernanke doesn't want anyone else to know it, but his smokescreens are getting pretty threadbare.
(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.
Then came the onset of the "sovereign debt crisis" and an initial correction for Gold. But as the crisis worsened and the Euro started to sag, Gold roared back. Gold hit a new all time high in terms of Euros as far back as February 11. On May 12, it set a new all time high in terms of the US Dollar. At the beginning of June, Gold closed above 1000 Euros for the first time. And this week - on June 8 - $US Gold set a new all time high, narrowly exceeding the high it set in May.
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 ongoing exception. Gold closed above 200,000 Yen in January 1980 and has not since approached that level.
On September 11, 2009, spot future Gold closed above the $US 1000 level for the third time. Since the end of October 2009, Gold has not been below $US 1000. The metal closed at a new $US all time high (of $US 1245.60) on June 8, 2010.
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Gold hit an all time highs on both the $US Dollar and the Euro this week. It hardly moved against the Yen. The only currency in which Gold remains below its February 2009 level is the Aussie Dollar. But Gold is catching up fast. On June 8, Gold reached $A 1530 before a big rebound by the $A agains the $US left Gold ending the week all but unchaned in $A terms. At current (June 11, 2010) exchange rates, it would take a Gold price of $US 1332.70 for the Aussie Gold price to equal the all time high it set on February 20, 2009.