GoldCore Update – Gold Strength Due to Risk of International Monetary Crisis

GOLD
Gold rose another 3% in US trading yesterday to finish the day at $1,119.35/oz. It has since moved upwards to as high as $1,123.50/oz Asian trading so far this morning. Gold is currently trading at $1,118.00/oz and in Euro and GBP terms, gold is trading at €815/oz and £711/oz respectively.

Technically gold is looking healthier again and has broken above the 50 day and 100 day moving averages and trend line resistance identified (see Chart). While the fear that gripped markets last week regarding a European sovereign default have abated, warnings regarding the long term viability of the multi currency union, long dismissed, are now being taking more seriously. The crisis in the Eurozone and the recent sharp fall in the Euro show clearly why a small allocation to gold remains important.
 

Also being questioned is the notion that gold’s strength is purely a function of dollar weakness or Euro strength. This is erroneous as seen with the recent surge in the price of gold in Euro terms. While there is indeed a long term inverse relationship between the dollar and gold, there can be periods of dollar strength and gold strength and this is when gold rises strongly against other international currencies.

A clear example of how gold can rise significantly in dollars even if the dollar only falls marginally in value was seen between July 2005 and May 2006. During this period gold rose from a low of $418/oz to over $730/oz or some 74%. During the same period the dollar did not strengthen materially. The dollar was trading at 1.22 to the Euro in July 2005 and at 1.28 by May 2006 for a small fall of some 5%. Similarly, the US Dollar Index only fell from around the 89.0 level to 86.0 during the period. Gold surged in value by 74% in dollar terms and by similar amounts in other currencies despite the dollar only gradually weakening over a period of months. Gold rose from below €400/oz to nearly €600/oz during the period despite the Euro strengthening against the dollar.

This clearly shows that gold’s price performance is not predicated on dollar weakness per se rather it is the weakness of international currencies and fiat currencies in general that is the real driver of the gold price. And concerns about the debasement of currencies through zero percent interest policies, quantitative easing and massive fiscal deficits will likely lead to gold remaining strong in all fiat currencies for the foreseeable future.

SILVER
Silver range traded this morning in Asia from $16.18/oz to as high as $16.32/oz. Silver is currently trading at $16.20/oz, €11.77/oz and £10.26/oz.

PGM’s
Platinum is trading at $1,550/oz and palladium is currently trading at $437/oz. While rhodium is at $2,500/oz.

News
•    Stocks posted their biggest daily percentage gain in three months on Tuesday after strong revenue from drug maker Merck and regional manufacturing data instilled confidence in the economic outlook. European markets also rose following new plans by European Union leaders to push Greece to get its budget under control. European officials gave Greece one month to prove it can cut its deficits. Debt problems in European countries including Greece, Portugal and Spain have been a major factor behind weakness in global stock markets in recent weeks.
•    Oil prices hovered above $77 a barrel Wednesday in Asia after surging the previous day amid expectations a growing U.S. economy will fuel increased crude demand. Benchmark crude for March delivery was up 37 cents at $77.38 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract rose $2.88 to settle at $77.01 on Tuesday.
•    A record drop in foreign holdings of U.S. Treasury bills in December sent a reminder that the government might have to pay higher interest rates on its debt to continue to attract investors. China reduced its stake and lost the position it’s held for more than a year as the largest foreign holder of Treasury debt. Japan retook the top spot as it boosted its Treasury holdings. The Treasury Department said foreign holdings of U.S. Treasury bills fell by a record $53 billion in December. That topped the previous record drop of $44.5 billion in April 2009.

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Stephen Flood

Stephen Flood is the CEO of GoldCore. He is a former Wall Street equity trader and FinTech expert. He has been involved in the precious metals markets since 2004 and has appeared as an expert contributor on CNBC, CNN, BBC, RTE & Bloomberg TV and has had articles published in the Irish Times, Irish Independent and The Sunday Business Post.

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