we write, the gold price is about to assault the $1,400 level having been
$1,332 on Wednesday of this week, a day ahead of the Fed announcement. Against the pound sterling, the
yen the Swiss franc and most other currencies the dollar has weakened
too. In the days ahead of
that announcement the dollar had been wavering between $1.38 and $1.40 against
the euro. After the announcement
the U.S. dollar fell quickly down to $1.42 against the euro. But then the dollar recovered
and is sitting at $1.41.
Recently gold has again moved in the opposite direction to the dollar,
until it ran up in the euro vigorously, so has this now changed again? Can there be more to the rise in
gold than just the fall in the dollar? We believe so, because far more
than QE 2 happened this week.
Did the mid-term elections affect the
price of gold?
In the run-up to and after the
announcements of the results of the U.S. mid-term elections the gold price
barely moved. On the
surface we can therefore conclude that the mid-term U.S. elections did not
affect the gold price. But
whether the Republicans or the Democrats won is not an issue for the gold
market. What is an issue
for precious metals is, can the U.S. government
govern in the monetary area sufficiently to invigorate the U.S. economy and
should they wish to do so, strengthen the U.S. dollar?
We found the result pointed to an
emasculation of the government’s power on the monetary front. Far too much of a burden has
fallen on the shoulders of the Federal Reserve, an institution with only
limited powers to resuscitate the U.S. economy. Government should shoulder that
role, supported in this by the Fed. Government does not appear to
now have the capacity to resolve the economic problems of the U.S. This tells us that the enormous
steps needed to be taken to strengthen the U.S. dollar are not going to be taken,
so a fall in the U.S. dollar is widely expected. The difference for the dollar
now is that its fall can be precipitous and not simply a repeat of the fall
in the last two years.
Control over the dollar’s value for the next two years appears
to have slipped from the grasp of the U.S. monetary authorities. This is extremely positive for
the gold price.
Did the Fed’s announcement of
Q.E. 2 affect the price of gold?
Ahead of the announcement a ‘bear
raid’ on gold was mounted that had the gold price drop from $1,358 down
to $1,332 in a steep dive that shook the weak holders and triggered more than
a few ‘stop loss’ positions. Ordinarily, this would have been
enough to deter investors, but it happened when the market was seeing thin volumes
of trade, hence the size of the fall. On the announcement these bears
received a very sharp silver coated, golden horn in the sensitive parts and
rose like a space shuttle breaking up through the fifties and sixties and on
through resistance at $1,370.
Right now we are tapping $1,400.
Undoubtedly the activity of buyers
looking for physical gold from most gold markets in the world was the primary
driver. But add to this the
scramble of short covering that is now going on. The short covering comes not
only from those who went short ahead of the announcement but from longer-term
shorts, realizing that the breakout to new levels is well founded on
fundamental factors. The
announcement from the Fed established those fundamentals. However, a greater and
greater proportion of gold investment buying globally is due to a growing
fear of the global currency system itself!
What are the Ramifications of the
financial world had been waiting for weeks for the Fed to make this
announcement. It was
important because it directly affects the value of the dollar inside and
outside the U.S. While the U.S.
does not intend to cause a devaluation that will enhance the international
competitiveness of the U.S., that is what is
happening. That is how the
rest of the world will see it.
They will take action in their own interests to protect
themselves. They have to or
see themselves suffer as the U.S. has been doing so for some time now. This will have three primary
effects on the global economy:
The U.S. will
lose the cooperation they had hoped for with China and other nations who they
asked to let their currencies rise but who will now suffer from a lower
dollar, such as China.
Global monetary cooperation, sorely needed now, will decay. Currency crises in different
nations will be inevitable as they each strive to protect their own
investment capital channeled into the U.S. and badly needed by them, will
accelerate its diversification from the dollar. This will accelerate the fall of
the dollar and see capital exit the U.S. To the extent this happens it
will act as a counter to QE 2.
3. It will undermine the dollar’s global hegemony, which in itself
will create considerably more uncertainty as to exchange rates and
happen to the role of Gold in money systems under these circumstances?
Julian D. W. Phillips
Gold/Silver Forecaster – Global Watch
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