OK, I know, everyone has their 2 cents on gold. What's driving it? Is a sustained break above $1000 immanent? To answer the first question...I have no idea...well Ok, I have some idea. To answer the second...I think it has a good shot.
In the past I have seen gold move due to at least one of the following factors 4 factors 1) a one for one drop in the US $ 2) an increase in physical demand due to industrial/jewelry needs 3) a spike in gold lease rates 4) investment/speculation demand as an alternative currency due to either fears of Armagedon or to offset a long term decline in dollar. None of these reasons appear to be responsible. The US dollar has been essentially traded flat during this latest gold spike. Industrial/jewelry demand doesn't appear to have changed significantly, nor its future outlook, lease rates haven't budged and the economy has stabilized showing signs of recovery while the equity markets have rise substantially and have only modestly dipped recently. So WTF is going on???? I think it could be due to the anticipation of the second part of reason 4 - a longer term decline in the dollar.
Whatever the reason, I don't think this move happened out of manipulation or randomness....something must be up. When you see the market do something significant that doesn't appear to make sense quite often it's sending a message which will eventually be known only after the fact and by then you will have missed a substantial part of the move, if not all of it.
The fed has signaled that it will keep monetary policy extremely accommodative until it is absolutely clear that the US has recovered and this will only be known when there's a clear uptrend in job GROWTH. During the last recovery, the fed didn't start raising rates from rock bottom levels until June 30, 2004 which was about 1 year after the first month of monthly job gains were recorded.
Think about what must be going in the minds of the Fed and the government for a second. They just went through the scariest series of financial disasters since the 1930's with the US and the rest of the world on the brink of total collapse and they were able to avoid it by extremely accommodative and experimental policies. Do you think for a second they are going threaten the beginnings of the recovery that is underway by executing an "exit strategy" that you see people rambling about. Exit strategy??? lol! You won't see a damn thing from the fed and the US authorities until it is painfully clear the worst is over. So what's the cost to all this? A drop in the US dollar. At 0% rates, the US dollar can now be used by speculators/investors for carry trades which will exert pressure on it, in addition to the unattractiveness of it vs. euro and other currencies w with respect to interest rate differentials and the increases in supply due to increased government spending.
Thus, inflation, in the sense of a depreciating dollar, is the price to be paid for avoiding a depression/economic collapse....and that's the price the US authorities would gladly pay because the alternative is far worse. What they are hoping for however, is a gradually declining dollar. This is what happened during the last recovery from 2003-2007. If the dollar collapses quickly then it's a whole new ball game....then that's when it could get really ugly in the markets and the economy.
Therefore, I speculate that the move in gold may be due to above thinking....the anticipation of a longer term drop in the dollar because of an extremely accommodative fed in the face of an economic recovery. A gradually declining dollar would be OK because everyone affected by it would have time to adjust and wouldn't notice it as much....it would be tolerated.
But here's the reality of the situation...it doesn't matter what the reason is. I'm no damn economist or dogmatist and I could be totally out to lunch with my thoughts. What does count though....and the ONLY THING THAT COUNTS is if you are on the right side of the trade. Going back to what I said a couple of day ago....the market rarely gives you gifts and on a true bull run you don't get the ideal pullbacks. So, if this breakout is for real gold should either keep rising or if it pulls back...it goes no lower than about 985... If it goes lower than that, then I'd become inclined to think that this is a false breakout.
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