Dollar Up, Gold Lower

Posted: Jul 31, 2012 12:01 AM

Gold was slightly lower in early trading after the dollar reasserted itself against a basket of international currencies. 

In early trading gold was down $3.94 to $1,618.96 and silver was off a nickel to $27.64, leaving the silver/gold ratio strangely steady at 58.5. 

Today’s price movement in gold hardly qualifies as bad news; gold prices are showing surprising resilience in the face of a stronger dollar.  One might have expected profit-taking to kick in after a run up, but so far it hasn’t materialized.  Gold seems fairly comfortable near $1,620, at least for the moment. 

Commodities in general were taken lower by the surge in the dollar as platinum, palladium, crude oil and copper all joined gold and silver to the downside. 

The dollar’s romp against foreign currencies may get cut short as the Federal Reserve considers lowering the interest rate on bank reserve loans.  Considering the interest rate is currently a token 0.25 percent, that means the Fed will, literally, be giving the big banks free money.  The interest rate move by the Fed would match a similar zero interest rate policy implemented by the European Central Bank. 

There is only one way the ECB and the Fed are coming up with all this zero interest money; they’re creating currency out of nothing.  The Fed’s last round of bond purchases came to $2.3 trillion dollars and, despite that massive amount of money being dumped into the economy, nothing much happened.

Sooner or later currency policy is going to come home to roost in the form of inflation.  I’m a little surprised it hasn’t happened already.  Inflation hasn’t kicked in because the slowing economy lowered demand for goods and services.  That situation will change when the drought in the midwest finally catches up to food prices.  Lucky for the Fed they don’t count food and gasoline prices in their inflation index!  Unfortunately, the rest of us are going to start feeling the bite.  

Precious metals will give you an edge during times of currency devaluation; that’s why it’s good to keep 10 to 15 percent of your wealth in a hard asset like bullion-priced gold and silver.  Think of it as an insurance policy against the government printing money. 

Chris Poindexter, Senior Writer, National Gold Group, Inc