by: Tim Iacono
May 17, 2010
Strong demand for an alternative to paper money after the European debt crisis again took a turn for the worse and leaders from both the European Union and central bank announced a $1 trillion bailout package saw the gold price surge in euro terms and go on the make new all-time highs when measured in U.S. dollars at $1,249 an ounce.
Heavy inflows to gold ETFs – more than 50 tonnes in the last seven days for the SPDR Gold Shares ETF (NYSE:GLD) – confirmed that investor interest has again ratcheted up though the silver price saw an even bigger rise. For the week, the spot gold price rose two percent, from $1,206 an ounce to $1,231, and silver gained five percent, from $18.35 an ounce to $19.34.
What has astonished many investors lately is that, while the gold price is understandably rising sharply against the euro, it is also moving higher against the U.S. dollar, something that many pundits thought to be unlikely given the historical relationship between the trade-weighted dollar and gold (an idea that I’ve railed against for some time now because there is no fundamental reason for the inverse relationship to exist). It would seem that either investors are losing confidence in all paper money or they figure that Europe’s troubles will eventually cross the Atlantic and are bidding prices higher in advance of that.
While gold priced in euros is surging, it is also quite clear that in U.S. dollar terms the “breakout from a wedge pattern” has indeed occurred, something that I’ve been writing about for months now. This is again shown in red in the one-year chart below and it now seems to be just a question of how high prices will go from here.
Heavy inflows to gold ETFs – more than 50 tonnes in the last seven days for the SPDR Gold Shares ETF (NYSE:GLD) – confirmed that investor interest has again ratcheted up though the silver price saw an even bigger rise. For the week, the spot gold price rose two percent, from $1,206 an ounce to $1,231, and silver gained five percent, from $18.35 an ounce to $19.34.
What has astonished many investors lately is that, while the gold price is understandably rising sharply against the euro, it is also moving higher against the U.S. dollar, something that many pundits thought to be unlikely given the historical relationship between the trade-weighted dollar and gold (an idea that I’ve railed against for some time now because there is no fundamental reason for the inverse relationship to exist). It would seem that either investors are losing confidence in all paper money or they figure that Europe’s troubles will eventually cross the Atlantic and are bidding prices higher in advance of that.
While gold priced in euros is surging, it is also quite clear that in U.S. dollar terms the “breakout from a wedge pattern” has indeed occurred, something that I’ve been writing about for months now. This is again shown in red in the one-year chart below and it now seems to be just a question of how high prices will go from here.
Recall that, normally, once a new all-time high is achieved for any asset, upward technical resistance vanishes since there are no historical points to compare to and prices tend to run higher in short order. This was the case last fall when the old high of about $1,025 an ounce was taken out only to see the gold price surge another $200.
As shown below, there is still another 15 or 20 percent to go for the current rally to become comparable to the last two – that would put the gold price at over $1,400.
As shown below, there is still another 15 or 20 percent to go for the current rally to become comparable to the last two – that would put the gold price at over $1,400.
Weighed against the non-existent technical resistance is the fact that seasonal factors will soon work against higher precious metals prices, so, my guess is that we’ll either see another $100 or $200 move up over the next few weeks or the rally might fade in early June.
What has been most interesting to watch in recent weeks has been the reaction of precious metals prices to developing news stories both in Europe and in the U.S. When the Dow Jones Industrial Average plunged almost 1,000 points on May 6th, the gold price surged, an indication that it truly is functioning as a short-term safe haven investment as opposed to how it reacted in late-2008. As for silver, it is fascinating to watch its volatility, plunging $1.00 an ounce on May 4th and then making that dollar back on May 7th, the day after equity markets tumbled. Both have year-to-date percentage gains in the low teens – far better than most other asset classes – but they have come to that point in very different ways.
I’ve not listened to it yet, but, there is more on the subject of gold price manipulation at Financial Sense Online where CPM Group’s Jeff Christian debates GATA’s Bill Murphy with Jim Puplava serving as the moderator.
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