Gold Higher On Euro Strength

Posted: Oct 18, 2012 12:01 AM

The euro had a big surge against the dollar and gold prices finally reacted by moving higher.

In early trading volume was light and gold was up $1.05 to $1,749.88 and silver was off $0.04 to $33.05, for a silver/gold ratio of 52.9. 

It was a relief to see gold finally react to currency valuations as the precious metal had stubbornly refused to move higher despite gains by the euro against the dollar in previous trading days.  The not so great news is that prices, on a percentage basis, didn’t come anywhere near matching the gains by the euro.  There is a stubborn bearish sentiment around gold this week that’s been tough to shake. 

Part of the recent trend in gold prices is related to structural shifts in investor confidence, particularly in Europe.  Germany has given Spain some flexibility in a precautionary line of credit from Europe’s rescue fund.  The perception of stability for Spain is rocking European stock markets as investors switch from defensive investments, like hard assets, to more risky investments in equities.  The iShares MSCI Spain Index, an ETF traded in U.S. markets that tracks with the Spanish stock market, was up 4.08 percent in just one trading day (disclosure: I own shares of this ETF). 

All this Euro-confidence is putting a dent in gold prices and, if it keeps up, will start lowering price forecasts for the rest of the year.  Another puzzler in all this is a silver/gold ratio that’s creeping up as well.  Now that the silver/gold ratio is moving closer to 55, I may get off the sidelines and start stacking silver again. 

When other investors are moving into equities is the time when I start thinking about selling equities and start looking for bargains in other sectors.  That is a very hard investment move for a lot of people.  At the very time investors start feeling good about their equity investments and the news is positive, it’s hard to go against the tide and sell.  When your equity investments are moving higher, you naturally want to hold on to them.  It’s hard to sell a winner, which is why the majority of investors lose money. 

Now is a great time to be making friends with your local gold and silver dealers.  The sudden surge in prices has put off many buyers and, like any retail business, your neighborhood precious metals dealer needs cash flow.  Most of them are ready to deal and at times like these it’s good to have friends in the business. 

Chris Poindexter, Senior Writer, National Gold Group, Inc