The DIVG-Is it the Gold Cartel's Battle Line?
Summary: The Dollar Index Value of Gold [PM Fix multiplied by the major currency dollar index ÷ 100] is an improved measure of bullion's intrinsic value. It accounts for the changing value of the dollar as well as gold. After rising from its post-Washington Agreement low the DIVG has been kept near 323 except for a brief anomalous excursion up to 362. Historical charts of the DIVG are presented and the importance of using the DIVG is briefly discussed.
Visitors to Bill Murphy’s Lemetropolecafe.com are already familiar with the dollar index value of gold [DIVG] as it was first introduced there about a year ago. The DIVG is simply the dollar index as represented by the major currency dollar index [÷100] multiplied by the PM fix. Capturing the combined values of these metrics accounts for the daily changes in both. For example, on days when the dollar is up 1% the PM Fix will fall by 1% if there has been no change in gold’s relative value. On the other hand, if gold has gained in relative currency value or the dollar has lost, then the DIVG will rise. Examining the history of the DIVG can shed important light on the progress or lack thereof in today’s gold war.
Background of government gold market intervention
In previous articles, I presented evidence of official gold market intervention by the Federal Reserve, Treasury and their numerous agents on Wall Street [Indeed, the Golden Sextant is an excellent resource for anyone interested in gold in general as well as the history of market manipulation by the government].
Today’s discussion presumes the reader has accepted, at least in a small way, that the otherwise free, world precious metals market is currently dominated by governmental suppression. That intervention comes in the form of the sales [below market prices] of Western central bank vault gold as well as gold derivatives designed to depress the gold price.
The principal tool used by the US Treasury Department to accomplish its goal is the Exchange Stabilization Fund. The ESF is a $30 Billion special fund under the exclusive control of the Secretary of the Treasury [More on this crucial fact later].
The motives for government gold market interventional activities are simple (1) to create a low interest rate regime (2) to expand the dollar credit universe (3) to inflate numerous equity market bubbles [which generate windfall capital gain revenues when they deflate] and not least (4) to reward their Wall Street supportive acolytes via the resultant profitable derivatives trade.
Suppression of the gold price enables low interest rates because gold is removed as a competitor to the dollar and US bonds, the defense of which requires higher interest rates. In the resultant regime, bond speculation flourishes, as players [especially those on the inside] are “immune” to inflation since the price of gold is its barometer.
To start the interventional process in 1995-96 it was necessary for the gold cartel to sell huge quantities of gold bullion. As reported by James Turk: "More Proof", and according to His Majesty’s Customs Records, more than 2,800 tonnes of physical gold bullion were shipped from the US and United Kingdom in 1997. This was pursuant to an enormous 4 standard deviation preemptive selling episode on the COMEX in June 1996. Since that time there has been a sharp and steady rise in US and Bank for International Settlements gold derivatives. These can be examined at the Golden Sextant.com.
Incidentally, Gold Fields Mineral Services, the “official” World Gold Council gold information source, did not report the above massive gold shipments in their 1997 statistics.
The Dollar Index Value of Gold: DIVG
By dividing the major currency dollar index [found at FRB: Statistics: Releases and Historical Data] by 100 and then multiplying by the PM Fix [found at 2003 London Gold Fixings], an important complexity can be removed from the task of following the fortunes of gold-that of accounting for the dollar’s variability.
A chart of the DIVG and EIVG [The Euro Index Value of Gold] is shown below encompassing the interval from January 2000 to the present. A line has been inserted at the DIVG value of 323 when the Euro and dollar were last at parity-December 5, 2002.
While it is tempting to draw a ceiling line higher at say, DIVG 330 as others have done, choosing the Euro/dollar parity value of 323 seems a better guess at the gold cartel’s preferred target as it affords a commonly traceable starting point-Euro/Dollar parity.
Cartel members holding and selling vault bullion naturally wish to have an agreed upon defense ceiling, and it is the writer’s view that DIVG=323 is likely to be that ceiling based on logic and the evidence we see in the DIVG’s trading pattern. If it were placed any higher, temporary retreat flexibility would be lost. For example, under an aggressive speculative attack, it is logical that reserve bullion sales would be marshaled by the gold cartel. Treasury personnel must then be allotted sufficient time for successful retrieval of those reserves from disparate cartel members. Therefore, the defense ceiling of DIVG = 323 seems to be the natural trigger for that gold reserve call-up [NB: Peter Fisher, the long-time Treasury gold specialist rumored to have been involved in such transactions has recently resigned without an announced position].
The above chart shows the DIVG and EIVG from January 2000 through the present. A 200-day moving average has been affixed to the DIVG as a yellow line-it too has seemed to settle on DIVG=323.
After the initial knockdown of the Washington Agreement the DIVG has slowly regained its strength up to and even exceeding the 323 ceiling but each time it was quickly driven back down-with one notable exception-December 5, 2002 through Feb 5, 2003.
The O’Neill Period-An anomalous DIVG rise
The DIVG broke above 323 on the day Secretary of the Treasury Paul O’Neill left office [Dec 5th] and then later, the up-trend was reversed back down the day John Snow was confirmed [Feb 5th].
Reg Howe suggested this was due to the lack of ESF interventional tools during O’Neil’s absence [The president is not empowered to operate the ESF]. Thus, the solidly rising gold price, weakness of the dollar and Euro strength as seen in the rising DIVG/EIVG was not a function of market dynamics, technical currency factors or dwindling cartel gold stocks, but simply due to the lack of the United States Treasury’s ESF manipulation tools. The gold cartel was helpless as it could not use its $30 Billion in ESF funding or access it’s cartel participant’s gold stocks to control the price of gold-they had lost an important battle in the gold war as this information is now available to the speculative community.
Had Secretary O’Neill not left his post abruptly, the gold investment community would not have obtained this crucially important tactical information. In all wars [especially in gold wars] perceived weakness of any kind is never rewarded.
Technical Analysis [TA] adherents should consider carefully what happened during the O’Neill Period and appreciate that major moves can occur without TA warning-since there was no way that O’Neill’s departure could have been foreseen by past DIVG trading patterns.
Indeed, should the Federal Reserve impose a fixed gold standard in the future [An extreme improbability], there would be no way that TA could predict it just as there was no gold price TA warning when President Nixon closed the gold window in 1971.
The DIVG = 323 - The Gold War’s Battle Line
Armed with vital DIVG battle-line information, participants can now better assess their gold war progress [or lack thereof] by following the DIVG and EIVG. For example, after reaching 323, there have been three cartel counter-attacks and three speculative recoveries including Feb 5, 2003. The first recovery-beginning in early April, took about six weeks. The second rebound-starting in early-June, took less time as gold longs better withstood the gold cartel’s selling forces, falling only to DIVG=310 with a fast recovery. Today’s skirmish reveals that the cartel is barely able to suppress the DIVG down five points [to 318] with an almost immediate speculative recovery.
Will the gold investors hold the line at DIVG=323, or will the gold cartel manage to force it back down to 305 as it did in April? Time will tell. But time may be something the gold cartel has precious little of…
Cautious investors exiting the rapidly deteriorating bond market will not be satisfied with anything less than assured long-term safety for their assets. If even only a microscopic fraction of them choose gold, the cartel ceiling of DIVG-323 will be left behind.
Michael Bolser
Valrico, Florida
August 14, 2003
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