The Gold Shuttle: Prepare for Countdown!

By: Alex Wallenwein | Sat, Mar 27, 2004
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The countdown begins:

10, 9, 8, 7, 6, 5, 4, 3, 2,1 ...

Liftoff!

You are now witnessing the gold shuttle's euro-moorings falling away. The dollar is smoking its very last in a self-consuming fire that once drove the price of gold - at least according to mainstream media reports.

Slowly, very, very slowly, the giant projectile begins its quivering rise from it's launching pad. It is now in the heat of its worst battle with the gravitational pull exerted on gold by a deliberately mis-informed public opinion.

From here on out, every inch of altitude gained will serve to lessen that pull, and add to the skyward momentum of the shuttle on its way to permanent orbit around this make-believe financial planet made of paper-mache...

The days of gold's ballistic forays into the upper stratosphere - only to return to earth again once it's thrust exhausted itself - are over. This "baby" is going into orbit! Smell the smoke. Squint to protect your eyes from the glare of its rocket blast, and feel the earth rumbling under your feet as the booster rockets do their inexorable work.

Catch your last glimpses of this shuttle - the last glimpses the naked human eye is capable of seeing without the aid of a telescope. Soon, it will only be an unusually fast-moving star in the sky of the earth's economic nightfall.

We now have observed a weakening of the link between gold and the dollar on a number of occasions. [Links] First there was a time-delay in moves between the dollar and gold, then there was an amplitude-divergence, and now the news is that the dollar looks surprisingly strong with a euro being sold even on the slightest insinuations of an ECB interest rate policy change, while gold remains largely unaffected, stubbornly floating high atop the $400 watermark in spite of all this.

Remember when, in January, the euro started selling off from 1.29 to nearly 1.22 dollars on Trichet's utterance that the ECB didn't appreciate the "brutal" currency moves of late? What happened to gold? It dropped from near $430/oz. all the way below $410 by January 15th, and finally below $400 in the last days of that month. And the euro went only to just below 1.24 during that time frame.

Now, we have a euro rather range-bound between 1.24 and 1.22, well below its January level that triggered this sell-off in gold, while gold is back up above $415.00 and just has the audacity to stay there. Compare these two charts:


Source: http://fx.sauder.ubc.ca/plot.html

It was precisely during March, when the euro finally broke below 1.24, that gold regained the $400 level, at first tentatively, and then convincingly after March 16th.

Somethin' ain't right in the financial press' explanatory toolbox (shall we say "talking points"?). Sure, the Madrid terror-attack coincided somewhat with the beginning of this most recent up-leg in gold, but look at the chart again: the date of the bombing was March 11, 2004. The immediate effect on gold: almost negligible. Then, around March 15th or so the real up-move began that brought us almost back up to $420.00. What triggered that? Musta been something else.

This is the signal many were waiting for: gold rising in terms of the dollar as well as in terms of the "majors" out there (the stronger currencies of the world. Look at this historical euro-gold chart and the characteristic wedge-formation:


Source: www.kitco.com

It was precisely during March, when the euro finally broke below 1.24, that gold regained the $400 level, at first tentatively, and then convincingly after March 16th.

Somethin' ain't right in the financial press' explanatory toolbox (shall we say "talking points"?). Sure, the Madrid terror-attack coincided somewhat with the beginning of this most recent up-leg in gold, but look at the chart again: the date of the bombing was March 11, 2004. The immediate effect on gold: almost negligible. Then, around March 15th or so the real up-move began that brought us almost back up to $420.00. What triggered that? Musta been something else.

This is the signal many were waiting for: gold rising in terms of the dollar as well as in terms of the "majors" out there (the stronger currencies of the world. Look at this historical euro-gold chart and the characteristic wedge-formation:


Source: www.sharelynx

and note that it only goes to 3/19/04. As of today, March 26th, gold in terms of euro stands above $343.00, and has therefore broken out of this wedge to the upside.

"ANOTHER" Thesis:

A famous poster called "Another" has years ago predicted that at some time the dollar and gold would rise together - at first blush a nonsensical notion. As long as gold is officially denominated and traded in dollars around the world, both prices rising together would require that gold rises even faster than a rising dollar. But a rising dollar i only possible if investors/traders are dumping other currencies to buy dollars, and that usually means that money is exiting gold as well.

However, it is at least theoretically possible that, while gold is rising due to "international security concerns" the dollar is seen as relatively strong versus the euro because euro area GDP growth lags so desperately behind the interest-rate goosed US economy that the euro becomes relatively unattractive despite its higher interest rate.

Can this be what we are seeing here now?

Maybe.

Yesterday, March 25th, about mid-day, the BuBa's Welteke just put a damper on expectations that the ECB will lower its interest rate on the euro by saying publicly that he doubt a rate cut would spur consumer demand in Europe. At almost the same time, Trichet, speaking in Cambridge, Mass., said that finding a way to fight unemployment is "urgent" - but looked toward "structural reforms" in the euro system rather than interest rate policy to rectify the problem.

Where does that leave us? Will the ECB drop it pants before the dollar faction and lower its rates?

It's possible, but highly doubtful. The ECB is committed to its price-stability mandate, and vigorously defends its independence from the political processes in individual EU countries. This explains why so far, they have left currency interventions or interest-rate policy changes untouched, relying instead on purely "verbal commands." Further doubt can be derived from Trichet's following statement: "When I look at inflation expectations, I find it at 1.8 percent, which is line with our definition of price stability."

He specifically refers to "price stability", which means that policy target is still high n the ECB's agenda, and notes that the rate of inflation is near the ECB's upper policy limit of 2 percent. This does not point to a willingness to risk higher inflation again by cutting rates now, especially since euro area inflation came back within the policy range only in January of this year, having spent most of the last - and previous years - above that mark.

My prediction: no rate cut this time around.

What does that mean?

It means continued downward pressure on the dollar, with any up-ticks remaining only temporary and limited.

I don't see the dollar and gold rising together for any appreciable length of time. The entire point is this: the lock-step relationship between the two that has been observed so much of late is breaking down. It no longer necessarily means that at rising dollar will bring dropping gold prices - but that is a far cry from saying the dollar and gold will rise together.

"Another" made his prediction in the context that gold and the dollar rising together will be the last warning shot before the world's entire economic voodoo-mess disintegrates before our eyes. That disintegration will, of course, still happen. We are in a time where all "normal" economic indicators no longer indicate anything of value at all. We do feel the earth shake as the gold shuttle throws off its former gravitational shackles. But there is unlikely to be a dollar-rocket rising alongside of it, and even if there was, that dollar rocket would be more in the nature of a fourth of July fireworks rocket. It will simply go "pouf" and will never get anywhere near gold's orbit.

Got gold?


 

Author: Alex Wallenwein

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

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