It was only dollar strength that prevented gold from bursting through the $1500 an ounce level yesterday and any return to dollar weakness should see this next major psychological barrier breached.
Author: Lawrence Williams
LONDON -
If it wasn't for dollar strength, which will have mitigated its price rise, gold would have burst through the $1500 psychological barrier yesterday - comfortably. As it was it has been riding high in the mid $1490s - it reached a new record high of around $1498 in spot trading at one time - as a combination of economic factors in Europe and the U.S. and other politico-economic uncertainties have led a flight into precious metals yet again. Further dollar strength saw a fall back to $1490 overnight, but it may not e long before we see the gold price's seemingly inexorable rise continuing to yet new highs.
The trigger for the main surge in the gold price was an announcement that S&P was downgrading its U.S. debt outlook although the overall triple A rating remained intact. Coupled with further serious worries in Europe on the Irish and Greek economies in particular and the continuing adverse impact on the EU itself. Coupled with the ongoing violence and revolution in the Middle East and North Africa - a malaise which appears as though it may be spreading to West Africa (Ivory Coast, Burkina Faso and now even Nigeria where religious and tribal tensions are springing up after the election). With interest rates remaining effectively negative in most of the Western World, there is little reason not to hold gold - and now the largest gold ETF, SPDR Gold Trust, has reported a 1.5% increase in its gold holdings, after around three months of decline.
China too is seeing further tightening as Government attempts to stave off ever-rising inflation continue - but the fear of rising prices is prevalent there regardless. And now inflation fears are beginning to strike home in the West too. Inflationary fears will keep interest rates negative and the oft-quoted reason not to own gold - the fact that it does not generate interest - remains irrelevant.
With huge amounts of money being manufactured out of this air by governments and Central Banks, in theory to help stimulate depressed economies, monetary values are being devalued the whole time - and the only constant to devalue them against remains gold, the supply of which is mostly outside, so far, the realm of government control.
What we are also seeing at the moment is a pretty sharp decline in stock markets right across the globe. Whether this is the precursor of another market crash - as in 2008 - is too early to say, but there are a number of respected commentators out there who believe stock markets are substantially overvalued at the moment and the recent bull run is at least due a correction. If a major correction does occur then gold will likely be affected too as hard assets like gold may need to be sold for liquidity reasons. But history suggests such a gold sell-off is likely to be shortlived and the yellow metal would regain its position and value very quickly. Each time this happens it brings gold's investment strengths more and more to the fore in the minds of an ever-increasing number of investors (many of the really big investors like Soros and Paulson have been invested substantially in gold all along).
Industrial commodities too are seeing falls in price in US dollar terms, but much of this is greenback strength related. With QE2, though the dollar remains inherently weak and it can't be too long before a resumption in dollar weakness boosts the gold price up through the $1500 level. Whether industrial commodities rise too depends on whether the perceived recovery in the economies of the U.S. and Europe continue to gather steam, and Chinese tightening does not cut too significantly into that country's growth.
Source: http://www.mineweb.com
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