The US Federal Reserve continues to engage in serial quantitative easing to
release more fiat dollars into the US banking system, with the aim of enlarging
the money supply to try in vain to revive a gravely impaired economy that is
already weighted down with excess debt and misdirected liquidity.
The express purpose is to lower long-term interest rates. At the same time,
gold keeps rising in price as other commodities fall because gold is a monetary
metal, not just an industrial
commodity. Gold has not increased in value; only the dollar has declined in
value as the price of gold rises.
The 28-year-long record high in gold price, at $850 per troy ounce, set at the
pm fix on January 21, 1980, was broken several times in January and February
2009, hitting a then all-time high of $1,218.25 on December 3, 2009. It was
broken again at $1,231.41 on August 19 this year, and again at $1,239.50 on
August 25. This reflects the sustained decline in the value of the fiat dollar
in gold of constant value.
The actual record high set in 1980 would be $2,387 in 2010 dollars, or 71%
higher than it closed on November 9. Gold is a hedge against a weak dollar, not
a hedge against inflation.
Gold futures on the COMEX Division of the New York Mercantile Exchange posted
strong gains on Monday, August 16, 2010, as weak economic data from Japan
exacerbated investor nervousness about the slow pace of global economic
recovery despite central banks, led by the Federal Reserve, having lowered
interest rates near zero, desperately resorted to quantitative easing to combat
deflation without visible effect.
This sparked some safe-haven-driven demand for gold on fears of more central
bank quantitative easing. The most active gold future contract for December
2010 delivery rose $9.60, or 0.8%, to finish at $1,226.2 per troy ounce. Gold
reached $1,350 per troy ounce on October 5, 2010. December 2010 delivery
reached $1,500 per troy ounce on the same day.
The smart money, having already been long on gold for decades in the context of
fiat money released by panicky central banks, continues to view the price of
gold as vulnerable to potential central bank upward market manipulation in the
face of general deflation risk in commodity markets in the prolonged financial
crisis. Investors are poised to push the price of gold towards $1,500 per troy
ounce before 2010 ends.
Gold breached $1,280 per troy ounce for first time in history on Friday,
September 17, 2010, and traded at $1,350 on October 5, at $1,372 on October 18,
2010, at $1,395.5 on November 5 and topped $1,400 for the first time in history
on November 8 amid market uncertainty on the outcome of currency talks at the
then upcoming Group of 20 summit in Seoul, Korea and renewed concerns over
sovereignty debt in the eurozone.
On November 9, gold touched an all time high of $1,424 an ounce as the market
reacted to the Fed's $600 billion quantitative easing (QE2) injection into the
US banking system and to World Bank president Robert Zoellick's surprise call
for including gold in a new currency based on a basket of dollars, euros, yen
and yuan.
Still that record gold price after adjusting for inflation remained below the
peak set in the early 1980s, which means the gold price still has some climbing
to do, or the market expects the fiat dollar has more to fall, along with other
fiat currencies that derive their exchange value with the dollar's value in
gold.
In the week ending Thursday, October 7, 2010, gold notched what were then new
records against the fiat dollar as bullion made a clean sweep of all other
currencies. After its gains against the dollar, bullion's 2.2% advance versus
sterling topped the list, followed by a 2.0% gain in yen and a 1.5%
appreciation against the Swiss franc. Gold managed to climb 0.8% in euro.
For the same week, the dollar's performance was highlighted by the following:
Morning gold fixes in London averaged $1,332, wrapping up the week 3.7% higher
at $1,360;
COMEX spot settlements averaged $1,330, but finished only 2.0% higher at
$1,334;
Average daily gold futures volume fell 3.9% to 142,055 contracts; open interest
rose from 4,753 contracts to 621,941;
COMEX gold warehouse stocks increased by 62,929 ounces (2.0 tonnes) to 10.960
million tonnes; inventories on that day covered only 17.6% of open interest;
One-year gold lease rates slipped to 0.26% or 26 basis points (1 bp = 0.01
percent) while three-month contract rates held steady at 0.3975%;
SPDR Gold Shares Trust (GLD) vault assets fell by 16.2 tonnes (521,935 ounces)
to 1,288.5 tonnes.
SPDR funds are shares of a family of exchange-traded funds (ETFs) traded in the
US and Australian markets and managed by State Street Global Advisors (SSgA).
Informally, they are also known as Spyders or Spiders. SPDR is a trademark of
Standard & Poor's Financial Services, a subsidiary of McGraw-Hill
Companies.
The name SPDR is an acronym for the first member of the family, the Standard
& Poor's Depositary Receipts (NYSE: SPY), the biggest ETF in the US, which
is designed to track the S&P 500 stock market index.
The risk trade resumed in the week ending October 7, 2010, as investors favored
junior gold mining shares over established producers; the Market Vectors Junior
Gold Miners ETF (GDXJ) gained 2.8% versus a 1.2% rise in the Market Vectors
Gold Miners ETF (GDX); the Gold Miners (GDX/GDXJ) Ratio fell from an average
1.66 the week before to 1.65; the S&P 500 Composite Index's correlation to
gold producers rose 5 points to 14%; the blue-chip benchmark's correlation to
bullion climbed 16 points to -3%.
WTI (West Texas Intermediate) crude oil prices rose 2.1% to close out the same
week at $81.67 per barrel; the gold/oil multiple continued to fall, dropping
from 16.8x to 16.2x.
TED is an acronym formed from T-Bill and ED (eurodollars), the ticker symbol
for the eurodollar futures contract. The TED spread is the difference between
the interest rates on London interbank loans and short-term US government debt
(T-Bills). Initially, the TED spread was the difference between the interest
rates for three-month US Treasuries contracts and the three-month eurodollars
contract as represented by the London Interbank Offered Rate (Libor). However,
since the Chicago Mercantile Exchange dropped T-Bill futures after the 1987
crash, the TED spread is now calculated as the difference between the
three-month T-Bill interest rate and three-month Libor.
Futures contracts in general, and Treasury bill futures in particular, are
taxed in the US in a manner that provides individual investors with an
opportunity to reduce taxes on gains and to take full tax deduction of losses.
The Internal Revenue Service (IRS) considers all futures contracts to be
capital assets. Unlike other capital assets, however, the holding period for
long-term gain is six months for futures contracts but only long positions
qualify. All gains and losses on short positions are short-term regardless of
the holding period. This asymmetrical treatment of long and short positions
gives individual investors an opportunity to profit at the expense of the
government by taking all gains as long-term capital gain at lower tax rates and
all losses as short-term with full tax deductions.
One-year TED spreads ending December 31, 2010, (an indicator of banks'
willingness to lend to each other) averaged 53 bps (basis points) - a point
higher than the previous week - on lower Treasury yields; three-month spreads
also rose a basis point.
Although three-month Treasury Bill rates and three-month eurodollar deposit
rates generally move together - rising in times of monetary tightness and
business cycle expansion and declining with monetary ease and cyclical weakness
- the co-movement typically is not exactly equal. The TED spread, which
reflects the difference between these two interest rates, can offer some
attractive trading opportunities to investors/speculators who can correctly
anticipate such differential movement between the two rates.
Finance rates embedded in COMEX gold futures traded at a 23 bps discount to
one-year Treasuries; the discount started to narrow with the late-week decline
in yields; the one-year gold contango averaged $10.70 an ounce, but finished
the week at only $9.70.
Contango depicts a pricing situation in which futures prices get progressively
higher as maturities get progressively longer, creating negative spreads as
contracts go further out in time. The increases reflect carrying costs,
including storage, financing and insurance. It is a term used in the futures
market to describe an upward sloping forward curve (as in the normal yield
curve).
Such a forward curve is said to be "in contango" (or sometimes "contangoed").
Formally, it is the situation where, and the amount by which, the price of a
commodity for future delivery is higher than the spot price, or a far future
delivery price higher than a nearer future delivery. This is a normal situation
for equity markets. The opposite market condition to contango is known as
backwardation.
A contango is normal for a non-perishable commodity which has a cost of carry.
Such costs include warehousing fees and interest forgone on money tied up,
insurance cost, less revenue from leasing out the commodity, as in gold.
For perishable commodities, price differences between near and far delivery are
not a contango. Different delivery dates are in effect entirely different
commodities in the case of perishables, since fresh eggs today will not still
be fresh in six months' time, 90-day treasury bills will have matured, and so
on.
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