Gold Price May Be Signaling The Next Leg Up

March 16, 2010 | By | Reply More

Gold IngotGold up by $22 an ounce by today’s` mid morning NY trading and may be signaling the next leg up for the precious metal.

At the same time the Dow and S & P 500 recorded slight gains and oil traded at circa $80 a barrel, much the same as they have been for quite a while.

Investors could be excused for thinking that not much is happening in the markets, even the major currencies have not been careering all over the place, although the dollar has weakened a little against the euro and sterling.

Nothing could be further from the truth, if you will forgive the exaggeration.

A steady stream of bad economic news for the last several months from virtually every developed nation together with an ever growing vocal body of opinion that China’s power house economy is becoming more of an illusion created by its own government’s spending than the reality of a profit driven society, is having its effect.

No longer are many investors taking the slowing down of the unemployment rate, property prices, et al, as good news but realizing that it is simply indicative of slightly less bad news than they have been exposed to in previous months.

Last week, and so far this week, the balance between bulls and bears is about equal, optimists and pessimists fighting it out in low volume markets seem to have created what is, to all intents and purposes, a stalemate.

But that rise in gold could well be signaling an outbreak of realism among investors who are not solely driven by their favorite chart signals but are conscious of the very real economic woes becoming daily more apparent to those that take the fundamental approach to investing.

Let us not forget that a successful investor should have an understanding of a few of the most popular and simple technical indicators, in our opinion principally to help with the timing of their trades, but that the fundamental considerations are the overriding priority.

So now the writing is on the wall that interest rates are not expected to rise until 2011 for fear of killing of what now seems an entirely illusionary return to growth.

Although the February inflation rate was slightly lower than anticipated, there is a real danger that serious inflation may break out too late to be controlled by rate rises and that will spell the final death of the out of control US and European economies.

We will have to wait and see whether another flight to the US dollar will be the route chosen by risk averse investors as the stop/start European economies melt down as a result of the next bad news headline or whether the next time round gold will be the odds on favourite for capital preservation.

Today’s gold surge is another clue that leads us to believe that the yellow metal is rightfully regaining its `numero uno` place and will continue to rise in value in the next six months or more as that double recession whammy becomes evident.

As we were writing this it crossed our minds that the US and other developed countries could be compared with the `SS Titanic`. Passengers who believed the ship was unsinkable rather like the US and those that got their life jackets on and were among the first to get into the life boats, those that believe in the dollar and those that put their faith in gold.

Little Timmy, Bernanke, Pelosi and their sidekicks could be compared with the band that continued playing until the ship went under in their attempt to keep up the morale of the passengers to the end.

Mind you we have still to be convinced that they will be brave enough to see it through to the end or will they elbow out the women and children from the financial lifeboat in time to save their wealth (and lives).

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