Gold Set to Ram $1000 Barrier Again

by Rick Ackerman on June 1, 2009 12:01 am GMT



The dollar’s bounce last week from a Hidden Pivot support that we’d drum-rolled here lasted all of four days, suggesting that more weakness is on its way. If so, we should look for gold quotes to blow past $1,000 by no later than mid-week. Our immediate target for the August Comex contract is 1066.40, subject to a “hidden” resistance just above at 985.80. A two-day close above that last number, or a trade more than $4 above it intraday, would be quite bullish for the near term.

Will this be the rally that starts gold on its way into the stratosphere? We have our doubts, since gold’s short-term charts suggest quiet strength, but not yet explosive power. That could change overnight, however, if the dollar is about to go “kamikaze.” The fact that the Dollar Index has failed to gain traction at some key technical levels in recent weeks is ominous. The trade-weighted Dollar Index settled on Friday at 79.34 and looks primed to test a key support at 77.69 recorded last December. That would represent a 2% decline from current levels, but if the support fails, we might see some panic spread into other markets, particularly T-Bonds.

There are already some disquieting signs in the bond pits, notwithstanding a sharp rally in the price of Treasury debt at the end of last week. The price surge on Thursday and Friday partially recouped earlier, heavy losses sustained in the days immediately before and after Memorial Day. But the bigger picture is growing downright scary, since T-Bond yields have crept back up to where they were before the spectacular futures rally in mid-March, when it was announced that the Federal Reserve was about to embark on a program of “qualitative easing.”

That’s just a euphemism for direct monetization of Treasury debt, but the plan appears to be backfiring, and badly. For not only have yields on government paper risen to where they were before the announcement was made, but mortgage rates have blown up as well — to around 5.50 percent recently. That’s up from 4.875 percent just a week earlier, and it suggests that the Fed may be losing control of market-based rates (not that it would have been able to control them indefinitely). Keep in mind that mortgage rates are pushing higher despite the fact that the Fed has bought more than $500 billion of mortgage backed securities in recent months — part of a plan to suck up $1.25 trillion worth of mostly unmarketable paper. This has caused barely a blip of hoped-for inflation in the housing market; nor do we expect it to do much more.


The (hyper)inflationists are almost certain to be right at some point, since the U.S. is headed toward bankruptcy and the prospect of having no one but the Fed to “buy” its debt. But we are not counting on fiscal stimulus, TARPs and all of the rest to bail out and estimated 40-50 million homeowners who are underwater on their mortgages. That is why we remain in the deflationist camp. We’ll join the inflationists if and when the government starts bailing out individual homeowners rather than banks. It could happen, but we don’t see any signs yet that Obama & Co. understand that this is the only way they’re going to inflate home prices. And incidentally, those who think that getting people to pay more for homes than they are worth is somehow going to put the U.S. economy back on track — a group of ignoramuses that includes all politicians except Ron Paul and a few others, the hacks they’ve appointed (i.e., Bernanke, Geithner et al.) , and most economists — deserve to perish in the Mindanao-deep bog they would create.


>> See what you’ve been missing: Get a free one week trial of Rick’s Picks.
>> Let Rick teach you The Hidden Pivot Method.