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In any discussion of the future of Gold, or of the price of Gold, the first thing that must be realized is that Gold is a political metal. In the true meaning of the word, its price is "governed".
This is so for the very simple reason that Gold in its historical role as a currency is fundamentally incompatible with the modern worldwide financial system.
Up until August 15, 1971, there has never in history been an era when no paper currency was linked to Gold. The history of money is replete with instances of coin clipping, printing, debt defaults, and the other attendant ills of currency debasement. In all other eras of history, people could always escape to other currencies, whose Gold backing remained intact. But since 1971, there is no escape because no paper currency has any link to Gold.
All of the economic, monetary, and financial upheaval of the past 30 years is a direct result of this fact.
The global paper currency system is very young. It depends for its continued functioning on the belief that the debt upon which it is based will, someday, be repaid. The one thing, above all others, that could shake that faith, and therefore the foundations of the modern financial system itself, is a rise (especially a sharp rise) in the U.S. Dollar price of Gold.
(ARCHIVES: 2010 - 2009 - 2008 - 2007 - 2006 - 2005 - 2004 - 2003 - 2002 - 2001 - 2000)
Mr Obama has given his State of the Union address. Mr Geithner has been grilled by the US Senate. Mr Bernanke has been confirmed for a second term as Fed Chairman, albeit by the weakest vote (70-30) in the history of the Fed. The Senate has approved a watered-down bill to "curb spending" and attached a $US 1.9 TRILLION increase in the Treasury's debt "limit" (to $US 14.294 TRILLION) which must now go back to the House and from there to Mr Obama for final signing.
It was quite a week for US legislation. It was quite a week for world markets too. The sudden about face on stock markets which began last week has spilled over to this week. Commodity and oil prices in US Dollar terms have slid lower. Gold, after moving back up towards the $US 1100 level early in the week, had another relapse on the day of Mr Obama's speech to Congress and closed the week down $US 6.70 or about 0.60%. Thanks to the ongoing focus on Greek budget and spending woes, the Euro fell sharply against the US Dollar this week with the trade weighted USDX rising 1.22 points or 1.6 percent on the week. This of course means that while Gold fell marginally in US Dollar terms, it rose in terms of most other major currencies.
(Chart appears here in original analysis
A new 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 in 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. The subsequent and inevitable correction has seen the spot future closing price dip below $US 1100 twice, the second ocurrence coming last week and continuing lower this week.
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 exception. That was because of the recovery of the US Dollar which had taken place since March 2008.
On September 11, 2009, spot future Gold closed above the $US 1000 level for the third time. It has remained above the $US 1000 level continually since the end of September and rose more than $US 200 almost straight up before the December 4 correction. Now, in mid January 2010, Gold is marking time in the low - mid $US 1100 range.
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Gold priced in Japanese Yen has joined $US Gold in the plus column. After getting into the plus column as the $US Gold price peaked, the Euro Gold price has slipped back into the "red" since early December. The most "extreme" example remains the Aussie Dollar Gold price. at current (January 29, 2010) exchange rates, it would take a Gold price of $US 1403.35 for the Aussie Gold price to equal the all time high it set on February 20, 2009.