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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)
I just listened to that, played by a man who definitely just keeps rolling along - Keith Jarrett at a magnificent solo concert in Tokyo in 2002. Just the thing for a damp dreary day up here in "beautiful one day, perfect the next" Queensland, Australia.
Keith will be 65 in May this year. He was 57 when he played that concert in Tokyo (on DVD). He is famous for his solo concerts and has been recording them for nearly 40 years now, the first one in 1973. Some people, of whom I am one, are a bit put off by his vocal "accompaniments" which he simply can help himself from breaking into. But oh my can that man play the piano. He is not a "mainstream" musician. I doubt if he has ever made a "music video" - apart from his concert performances of course. He's not "fashionable" . He is simply there, making great music either all by himself or along with varying numbers of equally talented musicians.
Now, where was I. Oh yes, Gold. Well, it's never been fashionable either, except for a very brief period at the end of the 1970s. It is simply there. It hasn't been doing much lately. It started 2010 just under $US 1100, got as high as about $US 1150 in mid January, dived to just above $US 1050 in mid February and is now at $1135. Gold's only real claim to fame so far in 2010 is that it has reached new all time highs against the Euro. But the Euro is only just into its second decade and has been descending against the $US ever since the US-based ratings agencies decided to pick on Greece back in December last year.
"Sovereign debt" remains the "issue" of the day, even though every nation has more of it than ever before. The entire situation is getting more and more hilarious. First of all, we have an almost universal consensus from the world's mainstream media that not only is the GFC over but so is the "recession". Add to the mix the pious platitudes from the G-20 nations that it is not "yet" time to wind down the recession and the deficits because we are not yet absolutely SURE that "growth" is back to stay. Stir vigorously with the ratings agencies' downgrades, selected carefully in areas which will do the most good for the US Dollar and the debt paper which the US Treasury keeps churning out. Each time the US Dollar falters or Gold and commodities in general give a little upward spurt, there is another downgrade or an announcement that a nation is on "negative watch".
There was another one of these this week after the Gold price jumped $US 25 over March 2-3. On March 4, the ratings agencies were at it again, only this time it wasn't a "sovereign debtor" in their sights. On March 4, Moody's cut the rating of the German Deutsche Bank by two notches - from one to three notches below its AAA level. Moody's apparently objected to the "lack of transparency" regarding the bank's capital market activities. This is truly funny when one considers the $US TRILLIONS the US Fed has spent to make sure that the "capital market activities" of the main New York banks remain a secret. It did the trick, though. On March 4 the US Dollar regained almost exactly its losses on the previous day and Gold fell a bit more than $US 10.00.
If you are beginning to think that this is a methodical exercise in downgrading Europe and its "alternative" currency and investment markets by the US ratings agencies in order to keep the dire state of the US banking, financial, fiscal and monetary situation out of the spotlight, we would not disagree with you. It is working so far, but it is VERY risky.
How can the sovereign debt of ANY nation (or group of nations) be at risk if its money is not also at risk. How can highlighting the deficits of one nation not eventually focus attention on the deficits of ALL nations? How can people in very fragile glass houses get away with throwing stones at their neighbours? They can't, of course, not in the "long run". But they can deflect attention away from themselves and especially their own problems, for a while.
That is what has been going on in the financial world now ever since Dubai hit the headlines at the end of November last year. Do all of the businesses, banking systems and sovereign nations which have so far been singled out for the attention of the ratings agencies have genuine problems. Of course they do. They have had these problems, which were ignored or evaded by the ratings agencies - for many years. When everyone is in the same sinking boat, it is the least powerful who are thrown overboard first. But unless the leak is patched, everyone drowns in the end.
Greece is being forced to at least make a gesture towards patching its part of the global leak. Its' economy is about the same size of that of Massachusetts. This is being done simply to buy time for the central banks of the most indebted economies - notably the one in the US - to continue to try to bail out the leaky boat by a borrow and spend as usual policy. It didn't work for Greece. It won't work for them.
There is nothing more certain in the world than that. The only question is how long it will take before it becomes so obvious that the spectre of "sovereign debt risk" engulfs the world in general and the US in particular. Once that happens, it is going to be VERY difficult to keep the $US Gold price below the highs it hit last December. In the meantime, Gold just "keeps rolling along" - at very attractive prices - even in Euros.
(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 three times. The third occurrence took place last week, but only for one day. As you can see, Gold is still pointing up at $US 1140 on this chart.
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. As concerns about "sovereign risk" mount, Gold is starting to recover against a still strong US Dollar. It has hit all time highs against the Euro and is up in terms of all the currencies in the table this week.
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With the USDX remaining above the 80.00 level, the only currency in which Gold remains below its level in this table is now the Aussie Dollar Gold price. At current (February 26, 2010) exchange rates, it would take a Gold price of $US 1419.00 for the Aussie Gold price to equal the all time high it set on February 20, 2009.