"The Gold price 'action' surrounding the latest BOE auction is the best example yet of the many that keep popping up. The strain of keeping down the Gold price is becoming harder and harder. More important, it is getting more and more obvious."
(Gold Commentary - January 18)
Last week, the Bank of England auctioned 20 Tonnes of Gold on January 16 at a "settlement price" of $US 283.50. The rest of the week, up to January 18, was spent in getting the actual spot future Gold price in New York down to that settlement price. This was successful. Gold closed in New York on January 18 at $US 283.40.
As you can see from the daily statistics above, spot future Gold has fallen further this week. On January 23, the $US 280 level was breached on the downside for the first time since January 8. As of Friday, January 25, Gold is back to almost exactly the same level at which it started 2002. Gold began the year at $US 279.00. It closed on January 25 at $US 279.10
So, the first month of the new year has almost been negotiated, and not much has changed. Or has it? For the first three weeks of the month, up until January 18, the U.S. Dollar had been going up in fits and starts. Between January 1 and January 18, the $US Index had risen from 117.21 from 117.96. THIS week, between January 21 and 25, the $US index has rocketed upwards from 117.96 to 120.18. The biggest daily move coming on January 25, when the $US index rose 1.22 points from 118.96 to 120.18. Gold, you may well know, was slowly falling against the $US up until January 24. But when the $US made its big move on January 25, Gold ROSE right along with it (albeit only $US 0.70 - from $US 278.40 to $US 279.10
Hmmmm.
It is a well-known fact that every U.S. Treasurer back to Mr Rubin has steadfastly maintained that the U.S. has a "strong Dollar policy". It is also well known that the U.S. Dollar has been slowly rising, with admittedly large fits and starts along the way, ever since 1995. For an analysis on whether this steady U.S. Dollar rise is in fact a "policy", see the Late January 2002 (#442) issue of The Privateer - published on January 27.
In this now almost seven year long U.S. Dollar rise, there have been times when the rise has speeded up suddenly. It happened in the first half of 1997 when the U.S. government managed to get on top of the government gridlock over the debt ceiling. It happened in early 1999 when the Asian financial Crisis was seen to be over after the Fed's three rate cuts of late 1998. It happened throughout 2000 and early 2001. In 2000 it happened because the Y2K scare proved illusory and the Fed was raising rates. In 2001, it happened because "recovery" was said to be "just around the corner" - and to make sure of it, the Fed was LOWERING rates.
One might say that the U.S. Dollar has been rising for every "reason" conceivable. Or, one might say that it has been rising no matter what was going on. The Dollar was rising when the Fed was raising rates in 2000. It was rising when the Fed was lowering rates in 2001. It was rising in U.S. market and economy boom times. It is still rising in the middle of a U.S. recession and while markets are running on the spot.
In fact, the only times since 1995 when the Dollar has fallen - for a while - have come at times when some suspicion dawned about the financial and political strength of the U.S. itself. The Dollar fell during the Russian debt default and LTCM fiasco of August/September 1998. It fell in the lead up to 2000 and the huge Fed liquidity buildup. It fell during the "hung" Presidential election of November/December 2000. And it fell in July/September 2001 when all the Fed promises of a "second half recovery" in 2001 proved illusory.
The Dollar did NOT fall in the wake of 9/11. It STOPPED falling - and it has been rising ever since. What is significant about January 25, 2002 is that the Dollar rise suddenly, and for no immediately discernible reason, accelerated.
Ostensibly, it was Greenspan testimony to Congress which set the Dollar off. According to Mr Greenspan, the U.S. recovery is already underway, it is stronger than it appears, and it will show up so clearly any day now that even the dunderheads in Congress can see it. Mr Greenspan didn't put it in quite this bald fashion, of course, but the result was for the currency traders to decide that they had better grab some more Dollars fast to ride the imminent upswing.
We've seen that one before. The attitude was identical in June/July 2001. Then too, the Dollar had been rising, sometimes quite precipitously, for the past few months. The attitude then was more understandable. The Fed had embarked on a VERY aggressive rate cut regime. Everyone assumed that it would "work" and that the U.S. economy would rebound - starting about June/July 2001 - six months after the Fed started cutting. It didn't, and the Dollar slumped.
This $US rise, the one which started literally on the Day of the World Trade Center atrocity, has no such "plausibility" behind it. Take a look at the weekly $US Index chart and you can see that the rise from September 2001 has been much more restrained than the one which took place in the first half of 2001. That is, it WAS more restrained, until it finally took of on January 25.
On July 5, 2001, the $US index hit a close of 121.21, which was a 15-year high. The main "victim" was the Euro. On January 25, 2002, the $US index hit a close of 120.18 - its highest close since July 5, 2001. The main "victim" was - you guessed it - the Euro. The $US index has posted new highs regularly ever since its present bull market began in early 1995. To perpetuate its bull market, it must do so again. That means a high this time ABOVE the 121.21 level it set seven months ago.
If it can do it, Gold's time has probably not yet come. If it can not, if the $US index fails at its July 2001 high, then Gold is set up to finally break out of its sub $US 300 prison. In a nutshell, on January 25, Gold went UP with a sudden acceleration of the Dollar. If the Dollar now fails at its 2001 highs and starts going down, Gold is almost certainly not going to go down with it. It is MUCH more likely to start going up much faster against the U.S. Dollar. Stay tuned.