Please note two items on the Gold charts which appear above. First, the daily chart moved back above its 100-day moving average this week - for the first time in nearly two months. Second, there was a BIG fall in open interest (and derisory volume) during the shortened Gold trading session on September 1. On Friday, the Comex Gold market closed at 12:10 PM EST.
Looking strictly at the data on Gold presented above, it would seem that Wall Street's summer has ended without much fanfare. But look more closely. Note particularly the events of August 31 and September 1.
Thursday, August 31 was a very interesting day. First, the Gold price started an unmistakeable move upwards in Asia, as reports came out of physical buying. Gold was not the only thing that Asians were buying, the Dollar continued to rise on that day in Asian trading.
Then, as Asia wound down, Europe wound up. The European Central Bank met and did precisely what everyone expected them to do. They raised European interest rates by the minimum possible, boosting them 0.25% to 4.50%. This, as you will note, is still 2.0% below the equivalent U.S. (Fed Funds) rate of 6.50%.
If you recall last week's commentary, please note that when the FOMC announced that they were standing pat on August 22, the reaction was another jump in the Dollar. The interpretation both inside and especially outside the U.S. is that everything must be fine. U.S. "growth" (5.3% in the second quarter) is not "inflationary". If it was, the Fed would have raised rates, right?
The immediate reaction to the ECB doing exactly what everyone expected them to do was not the same as when the Fed did what everyone expected them to do a week earlier. When the ECB raised rates, the Euro promptly fell to a record low against the Dollar. That was in US trading on August 31. Meanwhile, Gold was posting its biggest one day rise since the end of June - up $US 4.20 in Comex trading.
Finally, the rally on the $US Index which had been going on since the end of June finally managed to punch through its May 2000 highs on August 31. The Index hit an intraday high of 112.88 (previous high 112.66) and closed at a high of 112.57 (previous high 112.15). Something very different was going on here. The Dollar and Gold were going up TOGETHER.
Then came Friday, the last day of Wall Street's summer. The Asian markets trod water. In Australia, the market recovered partially from a 1.8% sell-off on the previous day with the local Gold index making a big move to the upside. Later on, European markets had an excellent day, with the German market up 1.8% and the French market up 2.8%. In New York, substantial early stock market gains were pared back by the close of trade as everyone escaped for the long weekend.
Gold fell $US 1.30 to $US 278.30 on desultory half-day trade of 5000 contracts. Open interest actually fell more than that, down 7270 contracts.
But while all this was going on, something startling was happening. The $US index, which had just climbed to new highs the day before, slumped 1% from 112.57 to 111.33. The biggest beneficiaries of this Dollar swoon were the Euro, which had hit an all time low against the Dollar on the previous day, and the Yen.
As The Privateer has analysed in several recent issues, and as we have been saying in these commentaries, the key to ALL financial markets, but especially the key to Gold, is the level of the U.S. Dollar. Two things stand out in the action of the past two days. First was the anomaly of Gold and the Dollar rising together on August 31. Second was the potential key reversal of a 1% fall on the Dollar index on September 1, the day after it hit its high for the year. Yes, Gold did fall too, but on derisory volume in a shortened trading day.
The fall on the $US index on Sept. 1 of 1.24 points (112.57 to 111.33) was the biggest one day fall since May 26, when the Index fell 1.63 points (110.63 to 109.00). That May 26 fall was about a week after the index hit its year 2000 high, and about a week before Gold took off in early June - rising $US 18 in four days.
It is too early to call a similar situation yet this time. But it is hugely significant that the Dollar has had such a serious relapse on the day after it finally beat its May highs. September is shaping up as an interesting month.