DMR–Gold trades sideways, markets looking for direction


Gold is trading sideways this morning after a quiet overnight session – down $1 at $1292.  Silver is down 8¢ at $15.67.  The markets, in general, seem unsure how to react to a slew of global political and economic events over the past few days and looking for a functional narrative upon which it can proceed.

Two pieces of news yesterday might provide that direction as time goes on. One is Fitch’s warning that it might drop the U.S.’ AAA credit rating if things do not improve in Washington.  The credit agency’s warning came hours before the president walked out of a meeting with Congressional Democrats at the White House. The other is the Bloomberg report of “a steep decline in demand” at the U.S. Treasury’s bond auctions. That piece of unsettling news comes at a time when the federal government’s needs are growing rapidly as China and Japan, the two largest holders of U.S. sovereign debt, have moved to the sidelines.

Neither development is minor or easily dismissed as passing phenomena.  As mentioned yesterday, when Standard & Poor’s lowered its credit rating of the United States from AAA to AA+ on August 5, 2011, it set off a strong rally in the gold price. On August 4, the price stood at $1662. Within four days it was trading at over $1800. By August 21st it had hit its all-time highs of over $1900 per ounce.

Quote of the Day
“The great Russian opera singer, Feodor Chaliapin, lost his entire fortune–then worth more than a million pounds–in the Russian revolution. This disaster seared him. He left Russia after the Revolution and went to live in France where in 1931 he bought gold bars and put them in a safe in his cellar in Paris. He was interviewed by the British Sunday Express newspaper on the 5th of May 1935, when he said, ‘People in Britain think governments cannot collapse. They think banknotes are money; banks are impregnable. But I have had everything I made in 25 years stripped from me. I was reduced to singing for tea in which there was sawdust, and bread in which there was wood. With my bar of gold and a pen knife I shall never go hungry.’” — Anecdote told by Haruko Fukuda, World Gold Council chair, in 2000 to the Business Club Zurich

Chart of the Day

Chart note: This long-term gold chart is drawn in log-scale. “Common percent changes,” says Investopedia of log-scale charts, “are represented by an equal spacing between the numbers in the scale. For example, the distance between $10 and $20 is equal to the distance between $20 and $40 because both scenarios represent a 100% increase in price.” On a linear chart, the lesser values are compressed to the point that the viewer misses the strength of a price move, and the greater values are extended to a degree that they tend to dramatize a price move – up or down. The log-scale chart presents data in a more realistic framework without the drama. As you can see from the chart above, the upward trend of the gold price since the early 2000s is not nearly as strong as the move between 1970 and 1980 in percentage terms leading some analysts to believe that we have considerable upside yet to be charted.

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