Gold Prices Correct For First Time Since July Amidst Geithner's Strong Dollar Talk At G-20 Meeting, But Then Rally Again After Talk Recedes And Dollar's Fall Resumes
Gold suffered its first major correction since July: Last Tuesday, the dollar rallied briefly, sending gold down $30 per ounce. Then, gold wandered slightly lower for the rest of the week, but today gold has started to turn the tables by rallying as the dollar resumes its long-term fall. On today's opening bell, gold rose by $18 to $1346 before consolidating down to around $1338 at noon (Eastern time). The cause for the rally is the failure of the G-20 Finance Ministers to come to any sort of consensus on how to stop the currency wars (the "race to the bottom") in advance of the upcoming meeting of G-20 political leaders in Seoul, South Korea November 11-12 - a week after the U.S. elections and the next meeting of the Federal Open Market Committee (FOMC), which is expected to announce the next round of Quantitative Easing.
The Bottom Line: Gold corrected as the dollar rallied last week, but gold is resuming its long-term rise as the dollar falls.
The Dollar's One-Day Rally (Last Tuesday) Fueled Gold's Latest Correction
Gold tumbled nearly $30 per ounce between the morning and afternoon London price fix last Tuesday, and it stayed down all week long. What happened last Tuesday? The action was quite dramatic in both China and America. Last Tuesday, the Chinese yuan rallied after the People's Bank of China raised its benchmark deposit and lending rate by 0.25%, its first such interest rate increase in three years. On the same day, U.S. Treasury Secretary Tim Geithner denied that the U.S. was deliberately weakening the U.S. dollar by saying that no nation can "devalue its way to prosperity." Geithner was apparently reacting to charges of a "currency war" made by Brazil's Finance Minister, Guido Mantega, who had raised the tax on fixed-income investors from 2% to 4% and declared that foreign capital would be taxed at a lofty 6%.
Alas, the effect of Mr. Geithner's tough talk lasted just one day (Tuesday), after which the dollar resumed its fall. The problem, for gold investors, is that gold did not rally late last week, as the dollar was falling. That represents a "currency-neutral gold price correction," which is nothing to be concerned about and, in fact, is a welcome relief. Gold has not had a meaningful correction since it traded at $1157 in late July. Gold's main bull market growth since 2001 has come from "two steps up, one step down." Gold's rise in August, September and early October seemed more like 10 steps up without a big step down. Now, that surge has ceased and we have a welcome correction - the "pause that refreshes" - before the next rise.
In the future, you can expect the U.S. dollar to rally on any given day, like last Tuesday, but it should remain on a long-term decline as long as U.S. short-term interest rates remain low (causing investors to seek higher returns elsewhere); as long as public debt is high and growing (which will be true as far as the eye can see); and as long as U.S. economic growth remains weak, compared to the rest of the world. (Last week, China announced 9.6% third-quarter growth and Germany confirmed 9% second-quarter growth.)
Post-Election Pain Facing America
We have something like a "preview of coming attractions" happening in Europe right now. In brief, the U.S. has been on a government-fueled spending spree while most nations in Europe have attempted to make some painful budget cuts. That's one reason the euro is up from $1.19 last June to $1.40 today. However, the entrenched unions and public workers of Europe are not taking this austerity kindly, and you can bet the same would happen if the new U.S. Congress tries some severe cost-cutting next year.
In France, the relatively benign change of raising the official retirement from 60 to 62 has almost halted the French economy: Refinery workers cut off fuel to the Paris airport, causing gas stations to close and many flights to be canceled. In England, plans for huge cuts in the bureaucracy were greeted by boos in the House of Commons. If the cuts pass Parliament, there could be French-style strikes in Britain. After the November elections, U.S. budget cuts will be equally tough to pass and implement here in 2011.
The next Federal Open Market Committee (FOMC) meetings will be held November 2-3, during national elections. The Fed has wisely kept quiet about its expansive monetary plans during the last two months of campaigning, but on the day after next week's election, you can expect them to make an announcement on Wednesday, November 3 about their future quantitative easing plans. Ben Bernanke has already proclaimed his bias - that he might throw more money at any real or perceived financial or economic problem America faces in the future, no matter who wins November 2.
Media Review: Investing in Gold
Despite gold's decline last week, there were two very helpful articles in the mass media in Friday's USA Today and the weekend Wall Street Journal. First, USA Today had a half-page article in the Money section which talked about how to invest in gold, leading off with collectible gold coins.
The October 23-24 weekend edition of The Wall Street Journal carried a consumer-review of the sell-side of gold in a column by Karen Blumenthal, entitled, "The Other Gold Rush: Selling It." She lays out the pro's and con's of how to sell gold. She advises dealing with businesses highly rated by the Better Business Bureau.
These articles are helpful and they also represent evidence that gold investing is entering the mainstream.
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