Nothing has changed from the point of vantage of the analytic principles with which we view the markets and the global economic and financial situation. What has changed, temporarily, is the vantage point from which we get our view of what is going on. The Captain (and crew :-)) of The Privateer are taking our first extended "holiday" for nine years. We are, from an Aussie perspective, overseas and will be until early October.
You will, I hope, forgive us if our initial GTW contribution is a bit shorter than usual. Having just come down from a mild case of "jet lag" and with the excitement of meeting and greeting old friends which we haven't seen for a long time, we have not had the time do our usual examination of what has been going on in the financial world over the past few days. That will now come back to more or less "normal" as we have managed to get everything up and running after the usual teething problems.
In our Gold Bull Market(?) commentary last week, we said that at less than $US 800 (Gold closed at $US 792.10 on August 15), the metal had been grossly oversold. That has proved to be the case, though it's early days yet. Gold regained over half of last week's losses this week to close safely back above the $US 800 level.
Last week, commodities had their biggest weekly fall on record. This week, they had their biggest weekly rise in more than three decades, despite the stampede back into the US Dollar and US stock markets on August 22. The gyrations across all the markets are getting quite hair raising. Oil leaped from $US 114.98 to $US 121.18 on August 21, only to fall all the way back to $US 114.59 by week's end. The Dow fell more than 300 points on August 18-19 only to end the week all but unchanged. The US Dollar swooned mid week and then recovered most of its losses. And Gold had one of its biggest single day advances this year on August 21 when it rose almost $US 23 on a spot future closing basis. In stark contrast to oil, the Gold price didn't give much of that gain back on August 22.
And while Gold on paper remains the plaything of the futures markets, the same cannot be said for the demand for the actual physical metal itself. The US Mint actually suspended sales of their Gold Eagle bullion coins on August 15 - as Gold on the futures markets plummeted below the $US 800 level - citing "unprecedented demand". They have now announced that they will resume "limited distribution" on August 25. The coins will be allocated "on a weekly basis until we are able to meet demand." Meanwhile, the premium above spot prices for the dwindling amount of physical gold coin that IS available in the US has reached unprecedented levels.
The sudden suspension of sales of one ounce Gold Eagles by the US Mint, and the announcement that they will begin to "allocate" distribution next week, is redolent of the declining days of the Treasury/IMF Gold "auctions" of the late 1970s. Back then, the demand overwhelmed what the Treasury/IMF dared supply and Gold took off. The monetary powers that be in the US have set themselves up perfectly for a replay. The only question is when it will start?
In the late 1970s, the problem was literally an inflationary one as the quantity of money soared despite rocketing interest rates. Today, the fundamental problem is literally a deflationary one. Recent reports by those who still compile and track US broad money (M3) data show that in July, US M3 actually CONTRACTED by $US 50 Billion. This is the biggest nominal contraction in the US broad money measure since the "series" began in 1959. And, as you know, this contraction is going on despite US interest rates at NEGATIVE levels in real terms and despite the US government and Treasury standing forward as the buyer of last resort for almost every kind of "subprime" debt out there.
The difference between investor attitudes in the late 1970s and today is that back then, the viability of the US Dollar was a raging hot topic of debate and concern. Today, that is not - yet - the case. While there is indeed growing concern about the weakness of the US Dollar - despite its rally over the last month or so - there are yet very few who are questioning its viability as a sound medium of exchange and reserve currency. The worse the implosion in the debt markets underpinned by the US Dollar, the closer that debate comes to breaking upon the world just as it did in the late 1970s.
When that happens, there is no way out for the Fed. A replay of the 20 percent plus interest rates necessary to lure global investors back into US Dollar denominated assets today would decimate economies everywhere.
(Chart appears here in original analysis.)
As you can see, the price action on this chart has taken Gold just below the uptrend line which has supported the entire bull market from 2002 to date. We also have descending lows on the chart - the $US 1000 high set in March and the $US 975 high set just over a month ago in mid July. With the rebound this week, the price action has once again moved above the uptrend line. What is now necessary is to see where the first solid support point establishes itself on the chart.
We began the table below in 2007 and have extended it into 2008, even though Gold in all four currencies in the table remain well above their 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.
A month ago, we had a new entry on the table for the first time since Gold topped the $US 1000 level in March. On July 17, Gold rose to 103233 Yen. That's was a new 2008 high for the metal in terms of the Japanese currency.
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