Gold Down On Dollar Recovery

Posted: Jul 03, 2012 12:01 AM

Commodities were mostly down on light volume on a trading week with a U.S. holiday on Wednesday that many people are using as an excuse to take the whole week off. 

Gold was off $10.88 to $1,587.82 and silver was down $0.30 to $27.23 yesterday morning, raising the silver/gold ratio to 58.3, the highest reading so far this year. 

Joining gold lower are platinum, palladium, crude oil and copper.  It’s hard to find a bright spot in commodities as the dollar gains back ground against the euro on light volume. 

Over at the U.S. Treasury the government is experiencing windfall demand for U.S. government debt, with so many investors buying bonds it’s pushing prices to new record lows.  While it may be politically expedient in some circles to make dire pronouncements about the state of the U.S. economy, the rest of the world is expressing confidence with their wallets. 

Unfortunately there are downsides to the U.S. dollar being a bright and shining light in the global economy.  For one it gives our government a pass on the consequences of carrying excessive debt by keeping the cost of borrowing money from other countries near zero.  The other unfortunate side effect is it bids up the cost of the dollar on global markets, making our exports less competitive.  If the dollar continues to stay strong against other currencies, U.S. manufacturing will start losing jobs to overseas competitors. 

All those factors taken together will give the Federal Reserve more latitude to consider injecting still more cash into the U.S. economy although to what end is not entirely clear anymore.  The Fed is not getting the economic boost from dumping additional cash into the economy because the money is not finding its way to small business in the form of expansion loans, which is where it would do the economy the most good. 

Taken together all these factors paint a fairly bright future for gold and silver.  The trillions in new cash flooding global markets has not really purchased anything that would stimulate growth, which means it’s a giant swamp of money that will either spur inflation, undermine the value of your cash savings or both. 

The best way to insulate yourself from currency follies is to keep 10 to 15 percent of your wealth in gold and silver.  It’s not good to keep too much of your wealth in precious metals because it is not a growth investment.  If you buy six ounces of gold this year, you’ll only have six ounces of gold next year, and the year after.  That is both the blessing and the curse of gold and why it should be a percentage of your investments and not your whole portfolio. 

Chris Poindexter, Senior Writer, National Gold Group, Inc