Gold Stable To Currency

Posted: Mar 24, 2012 12:01 AM

Gold returned to something resembling harmony with currency prices as the euro gained against the dollar and commodities, including gold and crude oil, were up in overnight trading yesterday. 

In early trading yesterday gold was up $2.82 to $1,649.40 and silver was up a penny to $31.64.  The silver/gold ratio continues to climb to 52.1.

It didn’t take long for some pundits to start hailing the end of the commodities bull market, which is complete nonsense.  Commodities are subject to the same volatility as equity markets because of institutional trading of derivative products where the trades are settled in cash.  That derivative trading feeds back to the spot prices for commodities like gold because spot prices are not based on actual physical delivery trades, but on a formula applied to the price of futures contracts. 

When commodity prices whither, like gold did earlier in the week, it’s mostly because those institutional investors have found greener pastures skimming from your 401(k) accounts in the equity markets.  But don’t worry, they’ll be back.  When those institutional investors return to commodities, then volatility will return with them. 

In the meantime gold is holding fairly well in the mid-$1,650 range and prices are relatively in sync with fluctuations in currency exchanges. 

Of course that can all change in a blink, up or down.  One whiff of investor panic, a sovereign debt crisis somewhere and all the talk of trading to fundamentals goes right out the window. 

While another crash is always possible in the volatile commodities world we live in now, I believe continued price erosion is less likely.  If prices move down, I don’t see them going too much below where they are now. 

Again, it will all depend on the news and where it comes from.  Until then it’s not a bad time to make some small buys and add to your physical holdings. 

Right now silver has my attention.  We’ve seen the silver/gold ratio rise from 48 at the end of February to 52 now.  Silver has been on a bear run for almost a year, with a particularly sharp death drop in September of 2011.  The last time the silver chart looked like that was 2008 into 2009. 

If I’m buying today, I’d probably split my purchase between gold and bullion-priced silver. 

Chris Poindexter, Senior Writer, National Gold Group, Inc