Confused About Falling Prices Of Gold and Silver? Part 1

Posted by Doug Eberhardt on Dec 17, 2011 in Gold | Comments Off

Are the gold bubble prognosticators right? Is the run in gold and silver over as they fall to a three month low? Nothing could be further from the truth. The reason gold and silver prices have fallen of late is because, as I have been saying, the Dollar Index is rising. This is a 40 year pattern that was last repeated in 2008 when the Dollar Index broke above the 80 mark. Yesterday, the Dollar Index broke above the 80 mark again.

The charts below show what things looked like when the Dollar Index rose sharply and gold fell in 2008 from March to October where we saw the Dollar Index go from 70.27 to 82.89 and gold fall from $968 to $731.

 

So where are we today with the Dollar Index? The chart below shows we bounced off the low 70′s and are now heading back above 80. The question to answer is, where will it stop?

The high for the Dollar Index during the last two run ups was 89.62 in March of 2009 and 88.70 in June of 2010. These are the two areas where I would keep an eye on to see if they are breached. What would cause the surpassing of these marks? To answer this one needs to understand what makes up the Dollar Index to begin with. Why does the Dollar Index go higher or lower? It is what the Dollar Index is priced in that matters.

From the above chart you can see that the Euro makes up 57.6% of the Dollar Index. Needless to say, Europe has been struggling of late causing the Euro to fall to the 1.30 level against the dollar. The chart below shows how quickly the Euro has fallen.

The problem for Europe as a whole is that the individual countries that are causing the problems, Greece, Portugal, Italy, Spain, Ireland, etc., can’t print themselves out of this mess. So their only hope, outside of France and Germany along with outside investors, is to rely on the only one’s who can possibly help them, the ECB, the Fed and the IMF. We already know the IMF has been selling gold to raise cash to help Greece and other European countries. I pointed this out in IMF Gold Sales and Credit Expansion Maneuvers Show How Desperate Situation in Europe Is – Central Banks Step In. European Central Banks have been selling gold the last 10 years at a time when if they would have held the gold, they would have been better off today. Switzerland was forced to sell much of its gold and I’m sure the Swiss today aren’t too happy about that.

But to understand how far the dollar can go higher, and thus possibly have a further downward effect on gold and silver prices, we need to see how far the Euro could move lower.

Continue to Part 2