Dollar Flexes, Gold Slides

Posted: Mar 06, 2012 12:01 AM

The dollar continued to flex its muscles yesterday overnight against other currencies in a show of strength brought on by comments from Federal Reserve Chairman Ben Bernanke.  The stronger dollar knocked commodity prices for a loop, including gold, copper and crude oil. 

Gold was off $8.90 yesterday morning to $1,703.90 and silver is down $0.38 to $34.34, which puts the silver/gold ratio at 49.4. 

The strong dollar is a two-edged sword in the economy.  While it means your money will go farther, it also means goods and services from the U.S. are less competitive in overseas markets. 

The later is why I believe the Fed will eventually be forced into another round of easing.  If the U.S. doesn’t play along in the global race to the bottom on currency it will suck the life out of any recovery in manufacturing.  Since jobs are part of the Feds mandate, I just don’t see that happening. 

In the meantime, though, a strengthening dollar will continue to erode commodities prices, including gold.  How long this goes on is up to the Fed.  It’s not all bad in that the initial comments by the Fed chairman caused the institutional investors to pack up their investments and flee for the exits. 

The departure if institutional investors leaves the rest of us with gold prices rising and falling roughly in sync with the currency market.  Once we reach a relative equilibrium it might be a good time to resume your regular small buys. 

The bottom line for retail gold and silver investors is the softness in demand coupled with strength in currency may open up a purchasing window.  I realize this is coming a little soon on the heels of my sell recommendations over the last couple weeks, but that’s life in a volatile market.  Typically the gold and silver markets are fairly sedate, but ever since gold became another speculative investment for hedge fund managers, it’s been more of a wild ride. 

Looking at the picture for gold down the road, the trends are still on our side.  We’re still trapped in a global currency race to the bottom and even the mighty U.S. Federal Reserve can’t win that battle alone.   Along with that, the U.S. government and broader economy are still mired in a pit of debt that will hold us back for decades.

Chris Poindexter, Senior Writer, National Gold Group, Inc