It goes against all conventional wisdom for a gold dealer to caution investors on the price of gold and silver moving lower. There are literally trillions of reasons why the price of gold and silver will move higher in the years to come, including a multitude of unsustainable future government obligations. But from a short term perspective I have seen some things of late and some going back to the end of September that lead me to believe the dollar will move higher in the months to come, possibly putting some selling pressure on gold and silver, both of which have had a nice run with gold up 5.29% the last 30 days and 29.68% the last year while silver is up 20.39% and 110.95% respectively. The current spot price of gold is $1,428 and silver $36.01. During this time, the dollar index has fallen from 81.13 in the beginning of January to 76.41 today. A year ago the Dollar Index was sitting at 77.04 and hit a high of 88.30 high by June 10, 2010.
In doing this analysis, I will look at what most financial advisors utilize when talking about the strength or weakness of the dollar, the U.S. Dollar Index, and will speak to the four main components that make up the U.S. Dollar Index; Euro (57.6%), Yen (13.9%) and Pound (11.9%) and Canadian Dollar (9.1%). Collectively, these currencies make up 92.5% of the U.S. Dollar Index, so it’s important to know what’s going on in these economies too, not just what’s going on with the U.S. economic data. At the same time, it’s important to understand any potential effect on the price of gold while keeping in mind human action/perceptions.
Reality Bites Europe (57.6%)
Over the weekend we saw 17 Eurozone heads agree to lending full capacity of the European financial stability facility with extra contributions from Germany and France.
The facility will be able to buy bonds from struggling member states. However these purchases will be made on the primary market instead of the open market, as some had proposed. Governments will in return have to launch a range of austerity measures.
The Euro, despite all of its problems with the PIIGS (Portugal, Ireland, Italy, Greece and Spain), has actually bounced off of its low of 1.18 to 1.39 (1 Euro = 1.39 U.S. Dollars) as of today. Does the actual admittance that the leaders of the Eurozone will use up to $698.5 billion to bailout the PIIGS make those in Germany and France feel good? What if they need more? The 17 leaders have an answer for that as shown in the above quote; they will ask the PIIGS to implement austerity measures. Why aren’t they asking these countries to implement austerity measures NOW? Does going into more debt for the Eurozone bode well for the future of the Euro? I think not. Keynesian fools are alive in well all over the world. Which brings us to Japan.
Reality Bites Yen (13.9%)
On Friday we saw a devastating earthquake and tsunami in Japan which saw the Yen take a quick dive. Then all of a sudden it reversed course mid-day and ended the day positive. If one was able to call their broker in Japan and get out of the stock market, then they would have saved themselves from some massive losses with the Nikkei down Monday 6.2% alone. The Japanese government stepped in immediately with $183 billion of liquidity, adding to the world’s highest Debt to GDP ratio of over 220%. The Yen strength will not last and I have been negative on the Yen for quite some time. The only reason Japan hasn’t imploded yet is because they have $750 billion of U.S. treasuries and are a net exporter.
With the most recent tragedy in Japan, a population that will have to pay for their tragedy through higher taxes and higher inflation from government stimulus, the Yen’s days are numbered.
Reality Bites Pound (11.9%)
The UK implemented dramatic austerity measures in October of 2010.The IMF warned a month later that they may have to be reconsidered if the recovery slows. So how has the UK done?
Mortgage Lending Fell 26% in January– This is supposed to be how banks make money; loans.
UK unemployment total rises further – “The UK unemployment rate is 7.9%, but for 16 to 24-year-olds it is 20.3%.”
UK austerity measures to throw 1 million into poverty – “More than one in two people with unsecured debts are struggling to cope. This is especially the case where some credit companies are charging up to 2,600 percent interest a year.
U.K.’s FTSE 100 Declines to Three-Month Low – “The risk-reward for investors is beginning to deteriorate,” Graham Secker, head of European equity strategy at Morgan Stanley in London, said in an interview on Bloomberg Television. “There are a number of factors that make us cautious in the short term. We are suggesting we take a little European bit of money off the table.”
There is no good news in the UK and the recent strength in the Pound is unwarranted and unsustainable.
Reality Bites Canadian Dollar (9.1%)
The Canadian Dollar has actually fallen versus the U.S. dollar of late as Canada has seen their trade surplus come in$2.5 billion under expectations. Unemployment remains high at 7.8% and housing market is due for a pullback and some say is in bubble territory. I think Canada has had its fun.
All Currencies On the Sinking Ship – Which Way Will It Tilt Next?
As I pointed out in Dollar vs. Gold In A Dual Inflation-Deflation Economy the U.S. economy still has its own problems. Nothing will change with that scenario as congress can’t agree on anything (although, like the UK and Eurozone leaders, congress may “talk” a good story with their upcoming austerity measures to avoid increasing the budget, but don’t believe them for a second).
From a short term perspective analysis though, based on human action, what does one do if a part of the ship is closer to the water than the other part? They run quickly to the part that is out of the water.This is what I see going on with the various currencies that have enjoyed the ride of late (Euro, Yen, Pound) at the expense of the U.S. dollar. I see a shift in this sentiment. The ship might be tilting the other way for awhile as the U.S. dollar recovers.
This could have an adverse effect on the price of gold for the short term. Any pullback in price should be used to acquire gold and silver American Eagles or other bullion metals. Keep in mind, holder of physical gold cares not that they fall 10% or 20% on their way to 100% or more in gains. The future is still bright for gold and silver. The U.S. government will see to it.
I will address this potential dollar rebound further tomorrow with an analysis of the most recent news of OPEC dumping U.S. Treasuries and its impact on the U.S dollar.
Related posts
About Doug EberhardtDoug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
Disclosure:
Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with capital you can’t afford to lose. This is neither a solicitation nor an offer to Purchase/Sell futures or options. No representation is being made that any account will or is likely to achieve gains or losses similar to those discussed in this outlook. The past track record of any trading system or methodology is not necessarily indicative of future results.
All trades, patterns, charts, systems, etc. discussed in this outlook and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author.