Gold Forecaster - Is the Rise in the Gold Price Just a Fall in the Dollar? By Julian D.W.
Phillips
| November 5 2010 2:27PM
As 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
Fed's announcement?
The entire 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 interests.
Foreign 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.
It will undermine the dollar’s global hegemony, which
in itself will create considerably more uncertainty as to
exchange rates and values.