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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)
On March 12, two very interesting events occurred on US markets. Gold, having been up quite near the $US 1120 for most of the day in Asia and in early trading in Europe, turned turtle once the US markets got into gear and closed for the week just above the $US 1100 level. Much more interesting, in the fact of this abrupt turnaround for Gold the US Dollar index (USDX) fell back below the 80.00 level for the first time since February 16, falling 0.47 points on the day to close at 79.84.
This was only the third fall below the 80.00 level for the USDX since the beginning of February. That was the period when the ratings agencies' downgrades of Greek debt were REALLY starting to bite, the retreat back towards the US Dollar and Treasury debt was ramping up and Gold was completing the $US 170 fall from the all time highs it had set two months earlier in December 2009.
There is a third interesting aspect to the market action this week. While the $US Gold price has weakened in the face of a falling $US (and therefore weakened further in terms of other major currencies), Gold stocks have NOT reflected this weakness. To give one example, while the Gold price in Australian Dollars fell 4.6 percent over the week of March 8-12 (while $US Gold was falling 2.8 percent), the Gold index on the Aussie stock exchange gained 1.6 percent. Given the fact that Gold stocks notably underperformed Gold late last year when the price was rising towards the $US 1218 all time high it reached on December 3, that is a notable performance.
On March 10, as Gold was falling below the $US 1110 level, the "culprits" were reported as being the hedge funds which were "scaling back speculative bets". No reasons were given for this, it was just happening. On March 12, when Gold briefly dropped below the $US 1100 level before regaining it, just, by the close of trade, the problem was sheeted home to a drop in US consumer confidence and fears of further Chinese "tightening". For the first time since December, the Greek debt "crisis" and the threat to the EU and the Euro were not mentioned. That would have been difficult, since the Euro rose quite substantially against the US Dollar on the day.
Late last year, we had a situation in which Gold was rising as the US Dollar fell. Then came the big correction as European troubles monopolised the headlines. Between the second week in February and the beginning of March, Gold and the US Dollar were rising together as Gold recovered from the correction. And finally, especially over the last three days of the week just ended, the US Dollar and Gold were going DOWN in tandem.
That just about covers all the bases, does it not? Last week, Gold "capped" its reaction to the European "debt crisis" by making new all time highs in terms of the Euro, the Swiss Franc and the British Pound. This week, the ex Italian Prime Minister Romano Prodi has informed us that the "Greek crisis" is over while reports multiply of a plan for the EU to install guarantees under new Greek sovereign debt sales which must take place between now and June. Gold immediately retreats against the US Dollar - EVEN AS THE US DOLLAR FALLS - and retreats even more against the major European currencies including the Euro.
International financial co-operation may be more a dream than a reality, but there is one thing that all purveyors of paper money can and do agree on. They do NOT want to see Gold going up, in terms of any currency. That is a fact, and it makes "timing" Gold moves very difficult, as Mark Hulbert observed on CBSMarketwatch on March 12. It is very true that no modern government would ever even consider "bailing out" anyone who has been unfortunate in the "timing" of his or her investments in Gold. If there is one thing that those who profess to understand Gold should know, that's it. See our "preamble" at the top of this page.
The primary "use" of Gold historically has been as a medium of exchange. Since the use of the metal as a money is now officially illegal everywhere, its primary utility is as a form of financial insurance, a way to remove a portion of one's liquid wealth from the machinations of the financial system altogether. With those machinations inexorably increasing, a Gold holding becomes a more and more precious alternative. But it must never be forgotten that Gold is the enemy of the state and its jealously guarded hold on what we use as money.
Those who look upon Gold as a way to "make" money are the ones most likely to get burned. Those who understand that Gold IS money have not bothered to "time" their aquisition of it. They have simply been aquiring it as and when they can for many years now. They will continue to do so.
(Chart appears 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 correction in the wake of the Greek downgrade. This week, an almost $US 100 upmove from the depths of that correction has been stalled as the chart turned down on March 10 with Gold closing below the $US 1115 level.
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With the USDX having dipped back below the 80.00 level this week, Gold has lost ground in all the currencies in the table. The only currency in which Gold remains below its February 2009 level in this table remains, however, the Aussie Dollar Gold price. At current (March 12, 2010) exchange rates, it would take a Gold price of $US 1443.10 for the Aussie Gold price to equal the all time high it set on February 20, 2009.