As the news rumbles bumbles and stumbles along, gold comments get shot into headlines like no. 8s from a 12 gauge Benelli. The Euro is crashing, the dollar is rising and gold is doomed. So I decided to check on some facts.
As I write, the dollar index sits at 82.51 and the dollar does appear to be on the rise. Today we saw a little spike in the dollar as the Euro shows ever more signs of weakness. In response gold dipped to $1550, or so, per ounce. Just out of curiosity I looked to see where the gold price traded last time the dollar index was at the same level. It was back in September of 2010. Where was the gold price then? We’ll see.
Looking back further, we see the dollar index traded at today’s level in April 2010, May 2009, March 2009, January 2009, December 2008 and October 2008. Now let’s retrace the gold price from those dates, beginning October 2008. This is good. At the end of October 2008 gold traded at $730 an ounce. At month end December – $875.
By the end of January 2009, the gold price was $925 an ounce. In March 2009 gold held around $920 but by May jumped significantly to $975. It wasn’t until April of 2010 that the dollar index traded near the 82 mark again, but by then gold moved to $1180 an ounce. And then by September of 2010 gold traded at $1245 an ounce with today being the next stop for dollar index at 82.51 and gold at $1550 an ounce. Now tell me how a rising dollar, this time, spells the end for gold.
Now let’s look at the number of times the Fed has printed money since October 2008. Beginning October 2008, with seemingly no choice, the Troubled Asset Relief Program (TARP) was signed into law. It provided $700 billion be used to purchase toxic assets from banks deemed too big to fail. However, that alone wasn’t enough to halt a market freefall. Not until late November, when the Fed announced its infamous $600 billion round of Quantitative Easing (QE1), did market stability return.
By March 2, 2009, as the last of the $600 billion was spent, it became apparent QE1 wasn’t enough as the markets teetered on the brink of total meltdown. The DOW had fallen from record highs above 14,000 to just 6,626, the S&P 500 fell from a record high above 1,500 to 683 – the NASDAQ fell from 2,810 to 1,293.
Then, in the markets’ darkest hour, the Fed once again came to the rescue with an extension of QE1. On March 18, 2009, it announced another trillion dollars would be committed to easing. Immediately, markets reacted positively and proceeded to rebound.
The rebound was strong seeing a steady rise over the next 12 months. Then, in anticipation of March 31, 2010 (the end of QE1), the markets began to crash. The four months to follow saw the S&P fall 16% creating fear of another wholesale collapse back to March 2009 lows.
By August 23, 2010, yielding to market pressures, the Fed, during Jackson Hole, hinted at another round of easing. The markets immediately sent a signal of approval and edged higher. On November 3, 2010 the Fed confirmed another $600 – $900 billion for the purchase of treasuries. QE2 would now run to June 30, 2011.
In the time between Jackson Hole and the expiration of QE2, markets soared. The S&P climbed 28%. Then QE2 ended and the markets threatened another crash. Printed money had become to the markets what a drug is to an addict. Take away the drug and a crash is inevitable. Again the Fed was cornered.
In response, the Fed made an August 9, 2011 announcement of plans to hold interest rates at already historic lows. Shortly after, on September 21, it announced the Twist – a fancy term for “refi”. The quick successive moves were intended to produce similar rescuing effects on the markets as quantitative easing without having to print more money. Instead, confidence failed to be restored as today’s markets flounder in volatility. Hence, rumors of QE3 have surfaced.
It’s clear, neither the markets or the Fed like a strong dollar. A strong dollar inhibits profits on exports. Hence more money printing to counter this effect and make it easier for the U.S. to pay foreign debt. The goal is to pay off foreign debt with dollars that are worth less than those borrowed. Sorry China.
If I were to make a call, I would say that soon the Fed will announce some “hula hoop” strategy to print more money and somehow route it to Europe. Then Europe won’t collapse, the Euro will actually get a boost because we printed more dollars and the world will be saved.
And gold will be $5,000 an ounce as predicted by MacNeil Curry, famous Bank of America Merrill Lynch analyst.
Brilliant! THE END!