The Dollar Fights Back

Posted: Aug 11, 2012 12:01 AM

The dollar gained back some lost ground, sending commodities prices for a late week tumble. 

Gold was down $5.75 in early trading to $1,610.65 and silver was off $0.24 to $27.88, leaving the silver/gold ratio at a surprisingly stable 57.8. 

Commodities were down pretty much across the board and largely in line with currency valuations.  Platinum, palladium, crude oil and copper joined silver and gold lower on the dollar’s Friday rally. 

There are several factors that could be contributing to the dollar rally.  China is reporting slowing export growth, signaling we may be in the midst of a pause in the global recovery.  U.S. equity markets have gained ground lately and the news of  wider global economic weakness may have prompted investors to lock in some profits before calling it a week. 

Another factor that may be prompting some late week selling is that bank regulators have ordered five of the biggest Wall Street banks, including Goldman Sachs and Bank of America, to draw up plans for dealing with the next major financial crisis without government help.  This is in addition to the “living wills” the banks were already required to produce that outline how to break them up if they go under. 

The new directive puts the banks on notice that they won’t be able to count on any extraordinary support from the public sector in the event of another catastrophe.  It turns out these plans were ordered back in 2010 but not made public because they contain proprietary information on the business processes of the big banks. 

In the longer term I don’t believe banking reforms will have much effect on gold and silver prices as commodities have a closer connection to currency exchange rates.  Despite today’s dip we’re still on track for gold to end the week higher, though silver will have to reverse its slide later in the day to come out ahead.  That’s not terribly unusual as silver prices tend to be far more volatile than gold. 

What you do have right now is a nice price dip to lock prices as my best guess is that gold, in the absence of any really earth-shaking news, will resume its upward movement next week. 

Despite the price volatility, I would still continue splitting my regular buys with silver as long as the silver/gold ratio stays above 55. 

Chris Poindexter, Senior Writer, National Gold Group, Inc