Gold continued its nearly effortless upward drift this morning, with prices gaining on light trading.
Gold was up $2.10 yesterday morning to $1,619.55, up from $1,611 this time the previous morning. Silver is down $0.02 to $28.92 bringing the silver/gold ratio to 56.
The bad news continues out of Europe with Spain getting a downgrade and European finance ministers engaged in an epic game of finger pointing. Spanish Foreign Minister Jose Manuel Garcia-Margallo tried to pin the blame for the Euro-zone debt crisis on Germany, the country now taking the lead in the crisis fight and turning to the G-20 for help.
Greeks will head to the polls in just three days to vote for a new government which will determine whether they stay in the European Union or dump the euro and go back to the drachma. Right now the parties that favor staying with the euro seem to have the clear advantage, but it’s not at all clear if Greece’s membership in the EU can be salvaged regardless of who is in power.
The news has been a disaster for equity markets, with indexes across the globe moving lower and the U.S. 10-year Treasury Bond yield stuck at an anemic 1.6 percent.
It’s quite possible gold is moving higher simply because it’s the best alternative in the investment landscape at a time when the world is awash in free cash. Regardless of the cause, gold is powering higher, even on days the fundamentals suggest it should be moving lower.
Trading is thin right now so it’s probably not wise to read too much into this current upward drift. Investors are still waiting to see if the Federal Reserve finds a reason to continue lax money policies during their meeting on June 19-20. At a minimum investors expect the Fed to extend Operation Twist, the effort to drive down long-term interest rates.
If the Fed allows Operation Twist to expire without additional stimulus, then expect gold prices to move lower. The market is still pricing in some stimulus at these levels; if it doesn’t materialize gold prices could correct suddenly.
On the flip side, if the Fed decides to continue Operation Twist or consider additional stimulus, then gold prices will certainly move higher, potentially much higher.
I’m skeptical of analysts suggesting prices in the $2,400 an ounce range for gold, but I think we could certainly test 2011 highs and possibly a bit higher by the end of summer if the Fed moves to inject more cash in the struggling economy.