Gold News

The Aussie Gold Price

The outlook for Aussie Gold Prices and the USD/Treasury-bond Depression trade...

SO ARE THOSE "green shoots" popping up through the ground, or as Nouriel Roubini told CNBC, are they just "yellow weeds"? asks Dan Denning in the Aussie Daily Reckoning.

Has the recovery begun? Will the Gold Price now turn decisively lower? Or were the least six weeks just an exercise in optimism for its own sake?

The Australian market gets to return its verdict on the issue this week, based on the mixed evidence it will get to consider. In the United States last week, April's retail sales figures showed the second consecutive monthly decline. Credit card defaults rose to record rates, meantime, with both Citigroup and Wells Fargo having double digit charge-off rates.

That data would seem to put paid to the theory that the US consumer is recovering his nerve and his will (or ability) to spend. The US economy has now shed over two million jobs this year. It's hard to see how the American consumer is going to charge his way through this mess and lead the world to a new prosperity.

What about our friends in Europe? Reports last week showed that the Eurozone's economy shrank by 2.5% in the first quarter. Germany – the industrial engine of European productivity – saw its output fall by 3.8% in the quarter. Granted, this is not as bad as the collapse in Japanese production and exports. But such a large slow-down in the Eurozone was enough to take two dollars out of the oil price.

Even so, we still think oil will rally because of the deep structural problems on the supply side. It will be worth watching. If oil keeps creeping up despite the litany of negative news about economic growth, you'll know the thesis is valid.

But what will investors do if the "green shoots" idea withers this week? Well, they may do what they did in February. Remember that? As heaps of negative economic data poured in, investors drove the Gold Price up alongside US Treasuries. Virtually everything else was sold lower.

We remember it because it was so weird. The rally in the US Dollar came at a point of maximum pessimism about US deficits. But as there was maximum pessimism about the global economy at the same time, you got a "flight to safety" bid for the dollar and Gold Bullion. Strange bedfellows for a rally, don't you think?

Hence today's riddler. The US Dollar index is on the verge of a breakout. But in which direction?

The chart shows the performance of the trade-weighted Dollar Index – a measure of the USD's value against its major trading counterpart currencies – over the last 36 months.

The red line is the 200-day moving average. And late last week, the index dipped below that line.  Which is typically a bearish signal. But the blue line shows the 50-day moving average. And typically, when the short-term moving average crosses above the long-term, it's a sign of bullish momentum.

So which way is the greenback headed? As the great Yogi Berra once said, "When you come to a fork in the road, take it."

The action on the US Dollar index will have a lot to say about the Aussie Dollar, Gold Prices, and oil, too. For example, the Aussie Dollar fell 2.1% last week against the USD. That was the currency's first weekly loss against the greenback since February. It's probably not a coincidence that it happened the same week the Australian government said the country would run a budget deficit until 2015-2016.

The Aussie Gold Price moved up two per cent on Friday as the currency fell. The US Dollar price of gold looks steady at about US$930 an ounce. As you can see, the Aussie price moved up A$24.95 to $1,242.47...

By the way, we think this shows that even as one currency weakens relative to another, BOTH can weaken relative to gold.

This happens when governments choose to run large fiscal deficits. It thus strengthens the Case for Gold and lessens the appeal of interest-rate driven "carry trades", whereby speculators borrow in one currency (or even in gold) and then put the money to work elsewhere, anticipating a better rate of interest.

However, the Aussie Gold Price has some work to do if it's going to re-test the high it made earlier this year at $1,546 an ounce. The big driver of that move was the plunge in the exchange rate versus the US Dollar. (Similar all-time record peaks also came for the Gold Price in Sterling, Euros, Swiss Francs and pretty much everything else bar the Japanese Yen and US Dollar, too.)

Could that happen again? The Aussie Gold Price is already up 123% over the last five years.

Well, Australian investors – like their British, European, Swiss and pretty much all other monetary peers – should note that it COULD happen from here.

That is, another manic episode of Depression worries could send asset markets down from their recent highs. The "let's-take-some-risks-with-borrowed-money-because-everything-is-gettin-better" rally would end, and a counter-rally in the Gold Price and US Treasury bonds might begin again.

This would mean death to the "green shoots" thesis. It would also mean investors have to reconsider the idea that the worst of this recession is behind us. So here is something to consider.

Maybe this pause in the certainty of the recovery will lead to even more aggressive monetary and fiscal expansion by central bankers and governments. Former Fed Vice Chairman Alan Blinder looked like he was setting the stage for that action in a weekend piece for the New York Times. Blinder wrote that the recovery in US GDP from 1933 to 1936 was cut short by premature concern about inflation and rising deficits.

Imagine that! A former Fed official saying not to be overly worried about inflation and deficits, or you risk another Great Depression...

"In the summer of 1936," Blinder writes, "the Fed looked at the large volume of excess reserves piled up in the banking system, concluded that this mountain of liquidity could be fodder for future inflation, and began to withdraw it...About the same time, President Roosevelt looked at what seemed to be enormous federal budget deficits, concluded that it was time to put the nation's fiscal house in order and started raising taxes and reducing spending.

"Thus, both monetary and fiscal policies did an abrupt about-face in 1936 and 1937, and the consequences were as predictable as they were tragic. The United States economy, which had been rapidly climbing out of the cellar from 1933 to 1936, was kicked rudely down the stairs again."

The US and world economies haven't stopped falling yet, much less hit the cellar. The rate of decline has slowed. But the scary thought here is that policy makers are in no hurry to reverse policies that have led to large deficits and a massive build up in bank reserves. This leads us to believe that the coming inflation – when it comes – will be much worse than it has to be. But some people just can't leave well enough alone and let the recession correct the excesses of the previous credit boom.

Who knows what people will think and why they think it? All we know as the week begins is that the markets are definitely at a fork in the road. A bearish fork for Aussie equities is probably good for the Aussie Gold Price, but tells us the economic situation is getting worse.

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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