Rise in Gold Prices is Different This Time
Julian D.W. Phillips, October 26th, 2009
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This is a snippet from a recent issue of the Gold Forecaster with Subscriber-only parts excluded.
For over more than 18 months we have watched the gold price churn below $1,000 and in the process forming three tops, before breaking out to above $1,050 in early October 2009. Why will it not fall back to well below $1,000 and possibly as far as $850 this time?
Technical Picture
Peter has given a great deal of detail below, in this issue and has warned, precisely, of the various support and resistance levels to watch out for. This information is critical for you, the subscriber, so as to help in your buying and selling considerations.
The U.S. $
For many months now too, while traders played the gold price against the U.S. $ the gold price has been precise in its inverse correlation to the $. We believe that this has mistakenly led commentators to place far too much emphasis on the $, as the inverse measure of gold.
We say this because the moves occurred at a time when many facets of the gold market were absent from the gold market, such as investment demand, low jewelry demand and central bank demand. Traders held sway over the gold price and it is they that decided that the moves of the $: € decided the price of gold. This lacked a reasonable basis to it. Why should the gold price be tied to the €? Such a relationship implies that the $ in isolation, is the most important factor in the gold market. We counter that and say, yes COMEX is a U.S. market and such traders do have enormous pricing power, but when the full force of all sides of the gold market come into play, COMEX diminishes in importance, just as the waves of the sea are of less important than tides are, to where the sea will climb on the shoreline.
Yes, the state of the $ is important in pricing gold and it is the ‘hub' of the currency world, but to gaze at it alone is to ignore the much bigger world of gold in its entirety, acting together in synthesis, in deciding the gold price.
This is amply demonstrated by the fact that the U.S. $ is sitting not far off the same place, against the €, as it was when gold was just below $1,000. We now foresee a larger de-coupling from the $ by gold, as we move forward. Yes, the waves of the $ will ebb and flow and continue to cause traders to move the gold price against the $ as before, but the tide of investment demand and other factors in the gold market will flow and dominate these moves over time.
Why Different this Time?
As we wrote last week, [Now available to new subscribers on request, to gold-authenticmoney@iafrica.com] while the facts of the article in the Independent [British] newspaper, informing the market that France, China, Russia and select Persian Gulf oil producers were going to price oil in a ‘new' currency were denied, the market is convinced that this will happen in time, even if it takes another decade. The reaction in the gold market was to bring in new investment demand via bullion itself, to prompt heavier central bank selling, to slow scrap sales and to cause traders to add some more gold to their holdings.
On top of the consolidation phase the gold price has been going through over the last 18+ months, this was a breakout pointing to an end of that phase. Now it sits on top of the $1,000 level, which forms a huge support to the price.
Watershed for the Monetary System
This showed a tipping of the see-saw against confidence in the monetary system. It was due to the realization that very little is going to be done to effectively reform the currency world and bring back stability to these markets. More than that, it was the realization that world governments just don't have the real political will to ensure a stable world currency system. There are just too many conflicts of interest for them to do so.
Meanwhile, the system decays on a broad front. The very fact that the hub of the currency world, the U.S. $ is losing favor so quickly sends out a bigger warning to investors and the global economy. Just take a look at what central banks have been doing in the last few months.
Foreign currency holdings grew by $413 billion last quarter, the most since at least 2003, to $7.3 trillion. Nations that report currency breakdowns put 63% of this new money into the € and Yen in April, May, and June. That's the highest percentage in any quarter with more than an $80 billion increase. Until now China has expressed concern about the behavior of the $ alongside other nations but were hesitant to act like this, because of the damage it would do to the exchange rate of the $. Now the realization of the fact that the $ will weaken is prompting action.
Imagine if oil was priced in a ‘basket of currencies, that diversification would be unstoppable and the $ would face a major crisis. Now, it is only a question of when.
Some commentators are saying gold is rising because of inflation fears, but inflation is not likely to accelerate until the global recovery is strong and deflation has evaporated. And yet gold is rising.
What concerns foreign holders of the $ is its exchange rate. This means far more than U.S. goods getting cheaper and European goods getting more expensive, it means the future worth of the $ in terms of all other currencies.
