Gold got hammered last week and traders used to the gold bull market got a brief reminder that prices can go both directions, sometimes abruptly.
Ironically, gold prices going down is not all bad news as it usually means currency is getting stronger, specifically the U.S. dollar. The wind under the dollar prompted some investors, many of whom we didn’t want in the gold and silver markets to begin with, to unload their gold.
It all sounds rosy until you take into account that the reason the dollar is getting stronger is because everything else looks bad in comparison.
The reason for the sudden popularity of the dollar is that the euro keeps losing ground as it becomes apparent that the Europeans are not going to be able to craft any deal that’s going to keep the union together as it exists today and investors are fleeing for the exits. Ratings agencies have sounded the alarm with a series of downgrades for several European nations with more to come in the weeks ahead.
Now we’re just waiting for the first Euro-shoe to drop. That could take the form of one of the Euro-zone countries defaulting on its loans or announcing they’re withdrawing from the union. And, like geese rising up to take flight, the first one taking wing will prompt others to join them.
Whatever happens, expect that average folks on both sides of the Atlantic will be the only ones surprised. Euro-zone finance ministers can’t tell the truth or they risk a run on banks already strapped for liquidity. So, if there is really bad news coming, don’t expect any advance warning.
Something bad is going to happen in Europe, but how bad is difficult to speculate. It could be something mild, like Greece defaulting, and the EU finance ministers and IMF step in to clean up the mess and that’s the end of it. It’s also possible it could be a lot worse, big enough to make waves in the U.S. economy.
Either way, bad news in Europe could have an immediate and dramatic impact on gold prices. If the news is bad enough, the gains in gold prices could be quite dramatic.
In the meantime, use dips in prices like last week as an opportunity to make small buys.
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