After starting out Friday looking like we were going to have another down week, gold vaulted in late day trading after a dismal jobs report.
By the close of trading gold was up $64.44 to $1,625.00 and silver was up $0.80 to $28.51 with the silver/gold ratio ending the week at 56.9.
While it’s tempting to take a victory lap and call some of my friends in the equity investment business and leave them a BOOM SHAKA-LAKA! on their voicemail, it would probably be a good idea to first review why we had the sudden spike in gold prices.
The price surge in gold came on the heels of the jobs report and many investors speculated that the employment numbers would finally spur the Fed into another round of stimulus. Coupled with that speculation is the fact there is a huge volume of free cash in the markets and few viable investment options.
If you believe, like I do, that gold was undervalued relative to the current economic situation, then a correction was no real surprise. The speed and potency of the correction was a little startling, but not that it happened.
The reason I’m not taunting my friends in the equity business are bond yields. The collapse in Europe is making the U.S. look good by comparison and there is a river of money flowing into the U.S. Treasury. We are so much the bright and shining light that people are willing to loan money to the United States for 10 years at the ridiculously low interest rate of 1.53 percent a year. The U.S. is awash in cash because we’re the thinnest kid in the global currency fat camp.
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With the Fed getting so much cash from outside the U.S., I believe there will be less incentive for Chairman Bernanke to consider stimulus. There is already a huge amount of cash in the system; printing more will not help anything.
If the stimulus doesn’t materialize, prices could easily crash back down this week. On the flip side, I’ve been saying for weeks that all this cash has to go somewhere and gold is one of the more attractive alternatives.
You can take solace that if you put your order in last week, you’re in the money before you even have to sign for the package. Enjoy the feeling while it lasts because Monday happens.
It’s going to be an interesting week.
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