Gold Only 10% Above 200 Day Moving Average – Growing Risk of Competitive Currency Devaluations and Global ‘Curr

Gold

Gold rose slightly yesterday as the dollar fluctuated and US stocks suffered small losses but has fallen 0.3% today. Gold was a whisker away from the $1,300/oz level on the spot market yesterday with some very determined sellers at this level. Those holding large short positions may be determined to defend this level in order to protect against further losses. Tentative speculative longs may take profits.

Gold is currently trading at $1,290.43/oz, €959/oz, £814.82/oz.

The growing risk of competitive currency devaluations (something we wrote about last year) and what has been termed a global ‘currency war’ (by Brazil’s Finance Minister overnight) has markets on edge and currency markets have been particularly volatile. The growing realisation that ultra loose monetary policies and "beggar thy neighbor" monetary policies may debase currencies is leading to continuing safe haven demand for gold. Gold is the only currency that cannot be debased and its value is not dependent on the performance of politicians and central bankers.  Problems with the periphery economies in the eurozone are not abating and appear to be spreading as seen in the crisis in Belgium. With questions about the future of the European Monetary Union being asked, gold should be well supported, especially in the euro.

Gold – 1 Year (Daily) and 200 Day Moving Average (Green). Click on image to view full size.

Many participants and much media commentary is expecting a correction here and this may come. However, the market is not particularly overvalued after its very gradual rise in recent weeks (up 3.5% so far in September). Gold is only some 10% above its 200 day moving average. Previous corrections in the last year (see chart above) have come about after gold had risen by between 10% and as much as 20%. Indeed in the last 5 years (see chart below), gold has risen as much as between 19.7% and 26.4% above the 200 DMA on different occasions. This suggests that gold could go higher prior to correcting.

Gold – 5 Year (Daily) and 200 Day Moving Average (Green). Click on image to view full size.

There was speculation at the LBMA conference in Berlin that pension funds who have very small allocations to gold (and many have no allocations to gold) are beginning to diversify into gold due to its lack of correlation with equities and bonds. This trend looks set to continue and is significant as pension fund assets are very large versus the small market that is gold. The entire global gold supply is worth less than $200bn a year while the largest 300 pension funds collectively hold about $6 trillion in assets. Therefore, even a small allocation of 3% to 5% to gold would contribute to higher prices; especially as the supply from central banks is set to go into reverse with central banks becoming net buyers again in 2010.

Silver

Silver is currently trading at $21.18/oz, €15.74/oz and £13.37/oz.

Platinum Group Metals

Platinum is trading at $1,610/oz, palladium is at $545/oz and rhodium is at $2,300/oz.

Mark OByrne

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