Gold and Silver Remain Near Nominal Highs – QE2 Leads to Increasing Dollar Concerns

Gold

Gold and silver continue to remain robust given the real concerns about the US, Eurozone and global economy. These concerns are creating doubt about the outlook for the dollar, the euro and other fiat currencies due to competitive currency devaluations and currency debasement. Gold has risen to near record nominal highs in British pounds (see chart below) and is less than 1% from a new high in dollars as the dollar has fallen again on QE2 concerns. Despite the recent rise in prices, physical demand remains robust especially in Vietnam, India and Asia.

Gold is currently trading at $1,356.78/oz, €972.18/oz, £856.28/oz.

US Dollar Index – 40 Year (Quarterly). Click on the image to view full size.

The dollar is looking vulnerable technically with the trend since 2002 remaining down (see chart above). Support at 74.2 and at 71.8 will likely be tested in the coming months as the Federal Reserve embarks on the most radical monetary policy seen in modern history. Below these levels is uncharted technical territory and there would be a risk of sharp dollar selling.

Given the scale of the fiscal challenges facing the Obama administration and the Bernanke Federal Reserve, the trend for the dollar is likely to remain down for the foreseeable future leading to higher gold prices. The dollar has lost 96% of its value since 1913 and fiat currencies throughout history have always reverted to their intrinsic value which is zero. The US must overcome the real macroeconomic, fiscal and monetary challenges facing it – if it does not then the US dollar will in the coming years lose its status as the reserve currency of the world (as did the British pound in the 20th century).

Click on the image to view full size.

Click on the image to view full size.

Suggestions that the Federal Reserve sell its gold reserves (unaudited since 1955) were greeted by the market with disdain. The Federal Reserve’s gold reserves are some 8,133.5 tonnes which is quite a lot in tonnage terms but is very small in dollar terms with a value of some $340 billion. In the context of the US national debt approaching $14 trillion and annual deficits of over $1.3 trillion, this is very little. Creditor nation central banks such as China, India and Russia, pension funds and high net worths would likely be willing buyers of the Federal Reserve’s gold – if the gold was ever sold on the open market. Thus the proposal is another short sighted, short term panacea. It is one which would likely actually make the US monetary situation worse off as it would lead to further concerns about the dollar as the global reserve currency.

Currency concerns are not confined to the dollar and Warren Buffet has voiced concerns about the outlook for the euro overnight.

Silver

Silver is currently trading at $23.50/oz, €16.84/oz and £14.83/oz.

Platinum Group Metals

Platinum is trading at $1,697.00/oz, palladium is at $589/oz and rhodium is at $2,175/oz.

Mark OByrne

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