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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.
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By now it is old news. As a follower of Gold you will almost certainly be well aware that the latest Gold surge - which has seen the metal go up in terms of ALL major currencies, not just the US Dollar - is being almost solely attributed to the announcement that the Indian central bank bought 200 tonnes (6,430,000 troy oz) of Gold from the IMF in late October.
The big spurt came on Tuesday, November 3 when the spot future Gold price in New York surged $US 30.90 to $US 1084.90. The announcement was made by the IMF itself, which is in itself a most interesting development. Central banks, governments and international financial institutions have been announcing Gold SALES for at least 15 years now. And, of course, every Gold seller requires a Gold BUYER. But not until the IMF announcement re the sale of Gold to the Indian central bank has there been any mention of who the Gold was actually being sold to.
The Australian government did not announce the buyer when they sold 160 odd tonnes of Gold way back in mid 1997. Neither the British government nor the Bank of England announced the identity of the buyers of the 400 odd tonnes they sold between 1999-2001. And the European governments and central banks have never announced the names of buyers of the Gold they have been selling under their "Washington Agreements" for more than a decade now.
Under normal circumstance, the IMF would simply have announced the sale of 200 tonnes of Gold with no mention of the purchaser. Gold would have remained flat (the IMF did announce the planned sale of 400 tonnes in late September) or it would have gone down. Is that not the way that the Gold price has been controlled for a long time now? In extremis, central banks and governments announce Gold sales. No purchaser is ever mentioned. The implied message has always been clear: "If we are selling Gold, you'd better sell too. At the very least you shouldn't be so silly as to buy any!"
Here at The Privateer, we always thought that these much ballyhoed Gold sales were quite hilarious. Clearly, somebody was silly enough in each case to BUY the stuff. But because the identity of the buyer was never mentioned, it was almost as though the central bank or government had cleared out some yellow coloured heavy junk they discovered gathering dust in the basement.
China quite recently announced that they had more or less quadrupled their official Gold holdings since 2002. For months now, the Chinese government has been running ads in all forms of their mass media urging the public to buy Gold and Silver. And in the immediate aftermath of the IMF named the buyer of their Gold, the Sri Lankan central bank piped up, saying hey, we bought some Gold too!!
We do not know exactly why the IMF chose to identify the purchaser of the Gold they were selling. We do know that the fact that central banks are no openly acknowledging the fact that they are exchanging at least some of their hoards of $US denominated "assets" for Gold is a fundamental change. For decades, the ultimate threat to Gold has been the possibility of central bank sales. Now, the rising threat to paper currencies is slowly becoming central bank Gold purchases.
And here we are as the year starts to wind down. Gold has been above the $US 1000 level, with a short hiatus at the end of September to accommodate the G-20 meeting, since September 11. Nothing like that has ever been seen before. It is true that the spot closing high was set more than two weeks ago on October 13 and that Gold did fall this week as the Treasury auctioned an all time record $US 115 Billion worth of debt paper. But it didn't weaken much, and the bull remains perfectly intact and recently revalidated all the way back to its start in the mists of time ten years ago.
(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 last year. 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 last year.
On February 20, as you know, Gold made it all the way back to the $US 1000 level. But it did NOT break through the $US 1000 barrier. Until this week, what had been traced out on this chart is the right shoulder of a gigantic "reverse" head and shoulders formation. But on September 16, spot future Gold CLOSED at $US 1020.20. That breaks decisively above the $US 1000 "double top" on this chart and revalidates the entire bull market - from the bottom. Late in September, had the downturn on the chart, only to see Gold burst above its September 16 high to put the final re-validation on the entire $US bull market. And this week, Gold has risen to just short of $US 1100.
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. But this time, even though it broke above $US 1050 this week, Gold did not get anywhere near its February 2009 highs in terms of the Aussie Dollar or the Euro and remained below it in terms of the Yen. Here's the record.
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Gold priced in Japanese Yen has now (only just joined $US Gold in the plus column since February 20. But take a look at the percentages by which the other two currencies remain below their levels of February this year. To take the most "extreme" example, at current (October 30, 2009) exchange rates, it would take a Gold price of $US 1438.60 for the Aussie Gold price to equal the all time high it set on February 20, 2009.