As a glance at the details of Gold's trading this week above shows only too clearly, Gold did precisely nothing in $US terms this week. Yes, we know it didn't trade due to the Thanksgiving holiday for part of the week, but the lack of movement even when it DID trade is almost uncanny. Gold has stopped dead - at or about its pre 9/11 level and right at technical support.
The rout on the Treasury debt paper markets which we discussed last week and which we analyse in detail in the upcoming issue of The Privateer (#438 - published on November 25) is still going on, although it has calmed down a bit this past week. With a little over two weeks to go before the last FOMC meeting of the year on December 11, Treasury yields (except for T-Bills at 1.96%) are all OVER the present 2.0% Fed Funds level.
Since the beginning of this year, the Fed has not DARED to let an FOMC meeting pass by without lowering U.S. rates. They were slowing the process (0.50% cuts had given way to 0.25% cuts) before 9/11, but afterwards, they went back to 0.50% cuts again. The Fed has cut more agressively this year than in any year of its history, and the bond market is telling it loudly and clearly that there is little if ANY room for more cuts.
In fact, given the fact that the yield curve on Treasury debt steepens sharply after one passes the 6-month bill, bond dealers are telling the Fed they expect it to start RAISING U.S. rates by the middle of next year.
Imagine the consternation on paper markets all over the world if THAT were to happen.
Speaking of "paper markets" (stocks, bonds, currencies etc.), the rationale for their continuing resilience is getting more and more bizarre. You have undoubtedly heard that the Dow is now in a BULL market because it is 20%+ higher than its post 9/11 low. Such a contention could only be made by someone who refuses categorically to recognize the EXISTANCE of a "bear" market. Obviously, the bloodbath on the Nasdaq (or the decade plus bear in Tokyo) has not convinced such people that "bear" markets really DO happen.
The Dow was up 125 points on Nov. 23 to 9959. The "reason"? Apparently, it was the good turnout to the shopping malls on the day after the Thanksgiving holiday. This had nothing to do with the fact that just about every shop in those shopping malls was offering deep discounts on just about everything. Funny, I don't remember discounts being offered BEFORE Christmas when I was young. That used to happen AFTER Christmas.
Be that as it may, consumers continue to consume, commentators continue to comment - yes - this one too :-), politicans continue to pontificate (proliferate?), and the markets (with the potentially devastating exception of the debt markets) continue to "recover".
I have little doubt that one of the most fervent "Thanksgivers" during the holiday was Mr Greenspan himself. His house of cards is still holding together. It still gives the appearance of recovering nicely. Mr Greenspan, however, will not be ignorant of what is going on over at the government debt markets, and that will be scaring him (you should pardon the expression) GREEN! The Treasury already had a go at lowering long-term rates on October 31 when they announced they were going to stop selling any more 30-year paper. That plainly hasn't worked. In fact, it has made the situation worse.
Mr Greenspan can't control longer-term rates. And because he can't control them and the Treasury can't control them either, his room for manoeuvre has been all but destroyed. Another 0.50% cut on December 11, with Treasuries at their present levels, would be asking for much more than trouble. It would be dicing with financial catastrophe.
And, as has been the case ever since the initial shock of the 9/11 tragedy wore off, the worse the financial situation gets, the lower the $US Gold price goes. Then, when the situation becomes REALLY acute, the Gold price is frozen in place. That is what we are now seeing, with Gold NOT having broken its uptrend, but sitting stationary right on it.
The present situation is eerily reminiscent of mid-1976, shortly before the second huge 'INFLATION' of the 1970s hit and the U.S. Dollar stumbled. It is eerily reminiscent of early 1985, when the Dollar keeled over from multi-year highs. It should be clear to most people that the one major factor in the recovery of most investment markets since 9/11 has been the recovery of the U.S. Dollar. That is still continuing too, despite the Treasury blood bath of the past two weeks. It is on very thin ice indeed.
We await the first signs of renewed Dollar weakness, which will be the first signs of renewed Gold strength. Gold is at solid support at present levels. Let's see where it goes from here. Further $US weakness in Gold, especially if it drops back below the $US 270 level, would put us on a probably path back to the 1999/2001 lows in the low $US 250s. A turn at present levels would validate the post April 2001 uptrend. We'll see.