Next week should be interesting. The US mid terms are on Tuesday. The Fed announces their plans to create a lot more US Dollars on Wednesday. And the Japanese announce what if anything they are going to do in response to this when their central bank meets on Friday.
Two weeks ago, we pointed out that the Gold price "boom" from June 8 to mid October this year was strictly a US Dollar event. Last week Gold in US Dollar corrected. That correction actually hit its low point this week on October 27 when the spot future price closed just above the $US 1322 level. But over the last two days of the week, Gold bounced $US 35.00, regaining about two-thirds of its correction losses. Even more interesting, unlike the big run up from mid June to mid October, this bounce in Gold was in terms of ALL major currencies, not just the US Dollar.
We have once again the first signs of a pre-requisite for a surging Gold market rather than a mere "bull" market. As we draw closer to November 3 and the next phase of Fed debt monetisation, Gold is once again rising in terms of ALL paper currencies. It is not just being seen as a "substitute" for the US Dollar, it is being seen as a viable alternative form of money.
The BIG pre-requisite for a surging Gold market is still waiting in the wings. This is when Gold starts rising ALONG WITH INTEREST RATES. That one hasn't been seen on a global basis since the late 1970s, the last time that the US Dollar was in a situation in any way comparable to the one it is in now. Rapidly rising interest rates reflect two things. The first is rising concern over the future purchasing power of the money which is being borrowed and lent. By Mr Bernanke's own statement, that is what he wants to promote at this FOMC meeting. He wants to raise "inflationary expectations" in the hope that Americans will start borrowing and spending again before prices rise further.
The second contributor to rapidly rising interest rates is a rising concern about the viability of the borrower. That is what Mr Bernanke (and Mr Geithner) do NOT want to bring about. In short, they want to have their cake and eat it too. The chances of this happening in the "real" world are about the same as the perpetual cake. They are nil. An interest rate shock - most virulent in the US but global in scope - is an absolutely guaranteed result of any further Treasury debt monetisation by the Fed. When that happens, and it will, Gold will surge.
The very first indications of this may have been given by the Gold's big more - against all currencies, not just the US Dollar - over the last two days of this week. We'll see.
(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. On September 7, the $US spot future gold closed above its June 2010 high. On October 14, Gold reached a new all time high just above $US 1375.
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. After a July correction, Gold exceeded that June high by September 14. By October 14, the $US Gold price had reached $US 1377. Last week, as the G-20 meetings commenced, the long-awaited Gold "correction" finally came.
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The big Gold surge from June to mid October this year was pretty well exclusively against the US Dollar. Last week, $US Gold corrected but Gold in other currencies corrected far less. This week, the $US Gold price has surged late in the week in the run up to the FOMC meeting on November 3 but the price of Gold in the other three currencies has risen even more proportionally. This may be the start of Gold's REAL rally - not just against the $US but against ALL paper currencies. The picture will grow much clearer after November 3.
As has been the case throughout 2010 to date, the only major currency in which Gold remains below its February 2009 level is the Aussie Dollar. At current (October 29, 2010) exchange rates, it would take a Gold price of $US 1531.80 for the Aussie Gold price to equal the all time high it set on February 20, 2009.