Gold Up Big On Euro Optimism

Posted: Jul 27, 2012 12:01 AM

There were several announcements yesterday that could impact gold and silver prices going forward, but it’s hard to separate all those from the background noise of a resurgent euro. 

Gold powered higher by $17.78 to $1,620.38 and silver was up $0.44 to $27.74, raising the silver/gold ratio to 59. 

Wow, remember when we were plodding along, seemingly stuck in the $1,580 price range?  That was two days ago.  So why the big change? 

Several factors are at work in the current run up.  The first is that the selloff in commodities was, in my opinion, overdone.  The second, specific to gold, was the announcement of a new bullionvault in Hong Kong that will be big enough to hold over 1,000 metric tons. 

A new gold storage vault in Hong Kong signals that Asian demand for gold remains healthy, even if it is slowing slightly from the previous 10 years.  The World Gold Council still expects Chinese demand for gold to increase 13 percent to 870 tons this year, an estimate that is actually lower than previous projections. 

The biggest factor impacting gold in the short-term is the recent announcement by the European Central Bank that it will do whatever is necessary to keep the European Union together.  In its current situation that means the ECB is prepared to supply virtually unlimited support to Spanish and Italian banks to help them over the current crisis.  Unlimited support means printing an unlimited supply of euros. 

Oddly, this strange bit of news propelled the euro higher against the dollar, which sort of blows a hole in the notion that markets are always rational.  More likely it simply means that investors believe that a united Europe will collectively perform better than the dilution of its currency will hurt them. 

One of the insidious aspects of currency dilution is that it can take a long time to manifest itself in reduced purchasing power.  It’s a good deal for governments and central banks because when they create fiat currency out of nothing they get to spend the full face value of the currency they create.  Currency dilution is in fact extracting value from the entire economic system by spreading the loss over a very large number of institutions and individuals. 

Hopefully you locked in your buy prices on gold before the recent run up as there will be increased volatility in the markets until all this good news sorts itself out. 

Chris Poindexter, Senior Writer, National Gold Group, Inc