It took a rise of nearly $US 16 in the oil price over two days and a fall of over 1.0 points in the USDX to get Gold moving up again this week, but Gold managed it on June 6 with a leap of $US 23.50 or 2.7 percent. That brought the Gold price back to where it had been in the middle of last week, before the $US 23.30 fall of May 29.
It has now been two and half months since Gold scaled the vaunted heights of $US 1000 in mid March. That was when the Fed desperately "bankrolled" JP Morgan so that it could "buy" Bear Stearns and prevent the $US Billions in "toxic sludge" having to be taken back onto Bear Stearns' books and "valued" at some type of "market" price.
The problem then - and now - is that there is no MARKET price for the paper that was dragging down Bear Stearns. There never has been. The paper is tailored for the individual "deal" and "priced" using a level of abstruse mathematics that would melt the average desktop computer down into a smoking heap of metal and silicon slag. The problem is that the inability to sell any of this paper on any type of open market continues to threaten to do just that to the world's major banks. And to bring the global financial system to its knees.
The Fed staved that off in mid March. It continues to do so to date. The banks haven't failed yet because of the fantastic paper juggling which has been going on ever since. But the REAL economy, in the US and everywhere else, can be saved by neither accounting nor financial prestidigitation. It is suffering - BADLY. In the US, the "middle class" is starting to starkly resemble an endangered species and the situation isn't much better in the rest of the English-speaking world. Wherever the habit of saving has been "discredited" by the sequential paper market bubbles of the last fifteen years the current situation is dire indeed.
The Fed, the other central banks, and the governments behind them are facing a choice which is getting starker with the day. They can continue to juggle figures to prop up the current system while impoverishing everybody who is not a politician or a commercial or central banker. Or they can come clean on the size of the problem, let the toxic sludge collapse from under the system, start to remove the tax and regulatory straitjacket, and give their citizens a chance to weather the inevitable financial storm and preserve something from the wreckage.
A cursory glance at the actions which the US government and the Fed have chosen makes it very clear the choice they have made. While the Fed inflates at levels never seen before, the commercial banking system which they rely upon to put this new "liquidity" to work by lending it to people are running scared. They know they are insolvent but they are working desperately to conceal that simple fact from their customers, both on Wall Street and on main street. The problem is that they have run out of "bigger fools" in the marketplace. They are left with the biggest fools of all, in Washington and at the Fed, to absorb the paper they can't sell. The Fed, in its turn, has stashed it all in the basement, "until financial conditions improve".
But financial (not to mention economic) conditions have NOT improved. Nor can they while no market can be made for the paper which is dragging down the banks. Historically, the outcome of a situation like that has always been the same. People stop borrowing and start repaying. Those that can start to actually save. And those who have something left over shun paper markets and start chasing REAL economic goods.
The fact that ALL this is now happening is now obvious. The oil price rise on June 6 was its biggest one day rise ever in simple Dollar terms. In two days, it rose 13.3 percent. To put this in perspective, had Gold risen by a similar percentage amount over June 5-6, it would have closed the week this week at $US 992 instead of $US 899.
But oil is "merely" the commodity which powers modern economies. Gold is more than that, it is the alternative MONEY which has the certain potential to destroy modern financial systems. That is why Gold is lagging oil. That is why on June 5, the spot future price of Gold and Silver went in opposite directions with the Gold price down and the Silver price up. A stampede into Gold now would make the financial crisis which the US faced at the end of the 1970s look like a mere bagatelle. It is coming, of that we are certain. But we are equally certain that the "powers that be" will fight it every inch of the way. We are in for a very interesting (northern) summer.
On March 17, we added the $US 1000 "X" to this chart - and that is as far as Gold got. As you can see, Gold has descended in three large "spurts" since then, the most recent taking it all the way down below the $US 855 level - Gold closed at $US 850.90 on May 1. Two weeks ago, with Gold at $US 925 on the chart, half the post March 17 fall had been regained. And now, after the turnaround on June 6, Gold is hovering right at the $US 900 level.
(Chart appears here in original analysis.)
We have extended the table below into 2008, even though Gold in all four currencies in the table is now well above its 2006 highs. Gold breaking out to new all time highs in $US terms at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold improved upon those January levels in all four currencies as spot future Gold closed above the $US 1000 level for the first time ever in the middle of March. But then came the big Gold sell-off - in two stages - the second of which bounced from the $US 850 level to now recover about half of its losses since March by the third week of May. And now Gold sits at $US 900.
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