"I haven't seen any stories that would move it, other than the usual one which is there seems to be a lot of buying on the COMEX"
The name is not necessary, to protect the (many) innocents. The quote is typical of what has come out so far about Gold's leap in New York on May 18. Boil it all down and it amounts to: "I can't find any reason for it!"
Here are several reasons for it, all of which have been analysed either on these pages or in The Privateer itself.
First and most obvious have been the activities of the Fed. Not content with a rate cutting orgy the likes of which has not been seen since 1982, the Fed has also been pumping up the U.S. monetary supply at almost unprecedented rates. As reported in the current Privateer, the pace of growth of U.S. M-3, if maintained for the rest of this year, would add $US 900 Billion to U.S. money supply.
Since the beginning of May, Treasury debt paper yields have begun to spike upwards. This has been especially pronounced in the middle of the range (2-5-10 year paper). When the Fed cut rates to 4.00% on May 15, the only Treasury debt paper which had yields below the Fed Funds Rate were those of maturities of one year or LESS. Clearly, a risk premium is emerging in Treasuries. Just as clearly, the Treasury market is anticipating HIGHER Official U.S. interest rates in the near future.
And has all this money pumping worked? "Yes" says Wall Street, "look at the Dow!". "Economic "growth" is just around the corner. It must be. The Dow is up almost 2000 points in the past two months!"
But the U.S. economy shows NO signs of coming out of its torpor. And now, the statistic that triggered the great Wall Street fightback, the U.S. first quarter GDP growth number of 2.0% (almost twice expectations), is coming under grave threat. On May 18, the March trade deficit was announced. It was up $US 4.3 Billion or 16.1% (the highest monthly increase ever recorded) to $US 31.2 Billion. The Commerce Department is warning that the first quarter GDP number will be "revised downwards" to 1.0% (in other words, CUT IN HALF) when the revision is announced on Friday, May 25.
Finally, after having dropped to within $US 2.00 of its August 1999 lows in early April, Gold had been rising slowly but steadily for six straight weeks. Finally, the seventh week of rises (May 14-18) was not so "steady". This week, spot future Gold is up $US 19.50 or 7.3%. And 70% of that rise took place on Friday, in New York, AFTER the London market had closed for the day.
Short covering? Sure, some of it was. But look at the "open interest" statistics above. Either a lot of "shorts" spun right around and went "long" this week, or there is a lot of new buying on the COMEX - and not much of that would be "short". By the way, that 105,490 figure for open interest on May 14 is lower than the low reached before the last Gold Bull market began in March 1993.
Oh yes, there are a couple of other factors that are starting to be cited. One is the fact that the latest Bank of England Auction (on May 15) was for 20% (20 Tonnes instead of 25 Tonnes) less Gold than all the previous ones had been. We analysed that one - in detail - in last week's Commentary. Another is a rumour that the Bank of England might actually be contemplating ending these auctions "early". Why (we hear you ask), when they are likely to start getting more Dollars in exchange for their Gold?
Now, here is what we had to say last week about the pressure building up under Gold:
"All of this (the factors discussed above) is INFLATIONARY in the true meaning of the word. All of it is putting more and more pressure on market rates. All of it is managing to keep the bogeyman of "recession" at bay, at least in the perception of most investors. But underneath all the "spin", the situation is deteriorating rapidly."
(Gold This Week - May 11, 2001)
The term "bubble" is a useful one in financial analysis, referring as it does to any market which has seen prices blown up to disproportionate levels. But, in this context, what is the opposite of a "bubble"? We don't know of a convenient word to use, but if one wants to describe the present $US Gold "price", that is what we are seeing. How about an "elbbub"? Kinda catchy - don't you think?
A "bubble" has nowhere to go but DOWN. An "elbbub" has nowhere to go but UP.
The chart of $US Gold is above. Here are the charts of Gold in the other currencies we cover.
Gold in Yen
Gold in Euros
Gold in D-Marks
Gold in Aussie Dollars
Go ahead, take another look at these charts. Toothsome, aren't they?
As can be clearly and delightfully seen, the Gold "elbbub" has (what the hell is the opposite of "burst"). Well, whatever it is, that's what has happened. It has not taken a crash dive in the Dollar, it has not taken a crash dive on the stock markets. A dive on both is surely coming, whether it proves to be a CRASH dive or not.
With the amazing re-flating of U.S. stock markets over the past two months, a crash, especially on the Dow, is a much greater possibility than it was when the Dow was subsiding relatively gracefully back below 10000 in late March. This latest "boom" has been built on unprecedented Central Bank profligacy combined with a tenacious clinging to orthodox economic faith. No one dares to challenge the gospel that all we need for prosperity is more and "cheaper" - "MONEY".
No one, that is, except those who suddenly decided that they had better buy some paper claims to Gold on May 18. It was always going to happen, the only question was when? Now we have the answer - NOW!
As already stated on the Gold Bottoms Commentary, the bottom is IN. What we need now is a confirmed uptrend. What is necessary for any uptrend to be confirmed is simple. The price must correct to a level HIGHER than its previous low, and must then go on to a HIGHER lever than the one it reached in the move before the correction.
Where will Gold start to "correct". No way of knowing that, but the major resistance line is obviously the $US 300 level. The overriding fact is that Gold has bottomed - at the END of two decades of stock market and paper asset inflation. The stage is perfectly set for a return to the Gold markets of the 1970s. More on that in our next commentary.
