Golds Fall Linked to Currencies

February 26, 2013 | By | Reply More

Since quantitative easing became Chairman of the US Ben Bernanke’s long term policy the US and other western stock markets have prospered, with the dark days of 2008 now almost giving way to the highs experienced in 2007 just before the bust.

This indicates that a growing number of  investors are gambling on a continuation of this easy money flow encouraging stocks to rise across the board with scant attention being paid to the nuts and bolts of a businesses solid growth prospects.

An image of the tech boom comes to mind and we all know what happened to those unwary investors that were a bit slow off the mark. Right now the fear trade is in the back locker, optimism is the order of the day and is a reason for the fall in the price of gold.

The Privileged Few Control the New Ongoing Money Supply

The difference between now and the tech boom is the huge amount of newly created cash that is swilling around in the economies of the developed nations and looking for a home.

How else would you justify buying bonds with yields less than the current inflation rate, let alone the rates likely to be in existence in ten, five or maybe only two years time down the line when the certain consequences of the current economic policies give way to steep or even catastrophically high erosion of the value of money.

After all the definition of inflation is an undue increase in the quantity of money in proportion to buying power and that is precisely the situation that the developed countries of the world are and have been experiencing for the past several years.

The only thing that has been keeping a lid on a runaway loss of buying power by the fiat currencies is the fact that so much of this newly created and growing pile of cash is still controlled by very few, that is the rich and powerful 1% , banks that are too big to fail and a relatively few major international financial institutions and it is this that is keeping us in virtual recession despite the glowing government announcements telling us that growth has returned and all is well.

Tell that to those on food stamps!

Bernanke’s justification for his policies is for this nice fresh money to be filtered down to Joe Public via loans to medium and small businesses that will then encourage employment and spending. If and when that happens we will see prices for everyday necessities explode.

Currency Wars are Here Despite Denials

However it is becoming more and more obvious that the unstated object of this vast expansion of the monetary base is in fact to encourage the erosion of the value of the dollar in order to make it easier to pay off the enormous US debt.

Other western governments are following suit so despite denials the currency wars are getting well into their stride. Why else would China be so anxious to build up its gold reserves, it holds billions of dollars that are depreciating day by day?

Retail Investors Like Lambs to the Slaughter

In the meantime the hedge funds and savvy speculators existing on their margin plays are reaping the harvest caused by these money minting policies. You can be sure that they will recognise the time to get out of stocks leaving those smaller  investors tied up in stocks and mutual funds to shoulder the losses.

These are the investors that hold on to their winning positions for too long and forget that  gains can turn into losses very quickly, they get slaughtered because of their greed! They are not professional nor are they “in the know”.

Gold Sellers Follow the Big Bucks

Possibly the principal short term reason gold has been unable to get off the ropes despite the optimism that was prevalent last November, when we thought that gold was climbing out if its previous short term down trend and aiming for new heights, has been the activities of futures traders in the metal growing their short positions.

Also many of those investors flooding into gold ETFs in the hope of quick gains have switched out into stocks as they have been beguiled by the current bullish  sentiment.

The fact that famed market operator, George Sores, one of the biggest investors in the SPDR Gold Trust (NYSE-GLD) shifted his stash out has not helped confidence in the yellow metal and encouraged more weak hands to seek returns elsewhere. GLD experienced a 20.77 tonne   outflow last Friday, its largest since August 2011.

The Fear Trade Only Lasted a Day

It was reported that at the latest meeting of the US Federal Reserve committee meeting some members, number unspecified, expressed reservations over the continuation of the bond buying program although no timing was mentioned.

The program, costing $85 billions a month is designed to keep interest rates down. It has become another nice little earner for the big banks on the back of the taxpayer who will finally pay the eventual bill for the misuse of yet more currency creation.

The report temporarily reignited the fear trade as stock markets went into reverse while gold and silver perked up. So far this Monday normality has returned, stock markets are up with gold and silver hanging on to their gains.

Technical Analysts Giving Opposing Signals

What have the technical analysts had to say about the gold outlook? In short, the usual mish mash of opinions and forecasts. Suffice to say that the big analytical news was that on Wednesday gold hit the dreaded death cross. This is where its long term moving average crosses above the short term moving average and is an indication that a bear run is imminent.

However the situation changed course by the end of the week. Conversely the RSI (relative strength indicator) shows that gold is strongly oversold so, at the end of the day it all depends on what your favourite indicators are or you could just spin a coin!

Risky Assets Drive Gold

The major driver for gold prices is the fear of risky assets such as currency erosion, property values falling, greed and no confidence in stock markets and, with the obvious exception of greed, none of these are at present uppermost in investors minds.

For now we can expect gold to continue to drift and hopefully stay in a channel between $1580 and $1680 an ounce spot price. Any break below $1525 can signal a further sharp drop, expect the price to take off if $1800 is passed through, that will signal the revival of the fear trade and you won’t want to miss that.

Nothing is likely to disturb the long term bull trend that gold and silver are experiencing, those whose confidence is waning should regain their mojo by examining the ten year gold chart and then considering the future consequences of current fiscal policy for any other outcome than the collapse in the value of the dollar, euro or GB pound, the perfect scenario for putting your money into gold to preserve your wealth.

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