I’m going to take somewhat of a contrary position on the Euro-zone sovereign debt issue. Yes, it’s serious and carries the potential to sap strength out of the global economy. I’m not trying to diminish the seriousness, but to me that’s more of a concern for the bond and equity markets. When it comes to gold prices and effects on the precious metals market, I don’t believe it’s the biggest driver.
Last week we saw gold prices drift down but it wasn’t related to the European debt crisis as much as the strengthening dollar as investor fled the euro. Certainly some gold selling is related to profit-taking, but at best that’s a contributory factor. Some people might be selling gold to make up losses in equities, but what are they going to do with the cash?
Unless people are using it for home insulation or mattress stuffing, there just aren’t many good options for investing cash right now. Some of it may be going into equity markets, but how deep that trend may be is a matter of some speculation. I certainly don’t see small investors in any hurry to get back in the market after a series of repeated crashes devastated 401(k) plans and brought home to the average American just how much the equity investment landscape is tilted against small players.
Right now, cash seems like a poor option, so I question how much of the gold price action we see today is selling. All the same, I expect to see gold prices continue to drift downward next week, for largely the same reasons they went down this week.
Long term I believe the biggest driver of gold prices is currency policy. Not just in the U.S. and Europe, but everywhere. In order to stay competitive in the global economy central banks are devaluing their currency, even in situations when their economy is otherwise healthy.
Overall, I believe funny money policies, more than government debt, are going to be the primary props under gold prices. The Fed moniker “lender of last resort” seems like a cruel joke on savers in light of the last 11 years of Federal Reserve monetary policy.
When I see the Federal Reserve warning Wall Street they’re going to need to go back to depositors and investors for their cash instead of the endless dependence on the Fed, when I see our government start to threaten countries endlessly devaluing their currency with equalizing tariffs on manufactured goods, and the government setting up a series of state banks, ala North Dakota, for direct lending to small business, then I’ll start being concerned about gold prices.
Until then, there are few better options for maintaining the relative value of your wealth than gold and silver.
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