Usually, the mainstream analysis of the price movement of Gold is as boring as it is predictable. But on occasion it crosses over the borders of the mundane into the realms of farce. In this regard, there are few better sources than CNNMoney.com. Take this piece - Gold is glittering again, but why?
The piece explains that when Gold was hitting its 2010 highs back in June, there was a very "good reason" for this. After all, that was the height of the "sovereign debt crisis" in Europe. Once that was "resolved", the Gold price retreated again. And so it did, in July. But for some unfathomable reason it has come roaring back in August. This, the article goes on, would be understandable if there was any prospect of "inflation". After all, Gold is generally viewed as an "inflation" hedge, right?. But the great fear today, especially in the US, is of "deflation". Why the devil is Gold going up when people are worried about falling prices?
This is said about a situation - in the US in August - when pressure inexorably built on the Fed to resurrect the program of "quantitative easing" (AKA money printing) they had resorted to last year to finally bring the first stage of the recession to a temporary plateau. Not only is "quantitative easing" inflationary, it is the absolute last resort of the entire inflationary process. Inflation being defined as an INCREASE IN THE TOTAL STOCK OF MONEY.
There are quite a few people out there in the world, and in the US too, who understand what inflation is. These same people understand that rising prices are one amongst very many RESULTS of inflation. These same people understand that the destruction of "wealth" meausured in terms of money which has taken place over the GFC to date has more than offset the creation of new money which governments in general and the US government in particular have been desperately resorting to.
Modern money is based on and comes into existence through the issuing of debt. No matter how leveraged the borrowing is, what stands behind that debt is some form of collateral. The GFC has eviscerated that collateral as the valuations placed on it have plunged. Governments have tried to offset this process by ramping up their borrowing and spending and by preventing the collapse in collateral value from being tested in the marketplace. The more they do this, the more the distrust of the paper based on this collateral becomes. As that distrust grows, so too grows an increasing reluctance to either lend or borrow.
There is not the slightest chance that there will emerge any GENUINE way out of the GFC until such time as the gartantuan malinvestments propelled by the credit money boom which has now collapsed are liquidated on a market. Every day that this is delayed makes the situation worse. Every new "Dollar" created by governments and their banking system makes the situation worse. Every new Dollar created in this manner is inflation, pure and simple. The fact that prices are rising or falling has nothing to do with it. Inflation is an increase in the stock of money.
As you know, the Fed announced a second go at "quantitative easing" on August 10. Once again, they propose to 'buy" the debt issued by the US Treasury directly with Federal Reserve Notes (aka US Dollars) created specifically for that purpose out of nothing at all. Anyone with an ounce of economic knowledge and/or any acquaintance with economic history knows (whether he or she admits it to him or herself or not), that such a course of action, if persisted with long enough, will lead to the destruction of the currency so abused.
The waffling about inflation or deflation expectations is one more weapon in the arsenal of those who are grimly determined that the debate about the GFC will never "degenerate" into a debate about the NATURE of money. The longer they persist in this direction, the more certain we can be that the "money" they are so tenaciously "defending" will not survive their ministrations.
Without such a debate on the nature of money, the only avenue left for those who understand the situation is to make sure they have some. And the only way to do that is to get hold of some Gold. That's why Gold is once again "going up".
The article concludes with the assertion that once the GFC is "over", there will be no reason to own Gold. The problem is that the GFC will not end - or even properly begin - until money can no longer be "created" out of thin air. Today, while the Europeans are making some moves towards reducing their deficit spending and while Asia is losing its appetite for US Treasury paper, there is no sign of that happening.
(Chart appears here in original analysis)
A 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, 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, 2010. 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 on June 18, spot future Comex Gold closed above the $US 1250 level for the first time ever, substantially exceeding the highs it set in May and early June.
At the beginning of July, Gold turned down with a vengeance. The $US 25 spot future Gold price fall on July 27 produced a genuine correction on the chart. The upturn came on the first trading day of August and now Gold is 70 percent of the way back to its June highs.
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 1258.30) on June 18, 2010. A week later, Gold closed just below that June 18 high. And then came the correction - for BOTH the US Dollar and the $US Gold price.
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$US Gold rose for most of this this week against a US Dollar which dipped early in the week and then rebounded to close with a small weekly gain by August 20. It would seem that the flight to "safety" is now going in conflicting directions although Treasury yields were still setting new lows this week.
As has been the case throughout 2010 to date, the only currency in which Gold remains below its February 2009 level is the Aussie Dollar. At current (August 20, 2010) exchange rates, it would take a Gold price of $US 1395.60 for the Aussie Gold price to equal the all time high it set on February 20, 2009.