Gold was down on the week after disappointing news from the Federal Reserve about additional fiscal stimulus, but finished the week with a strong surge that pushed prices over $1,600 an ounce.
Gold finished the week up $13.54 to $1,602.80 and silver finished up $0.54 to $27.69, a strong finish for silver lowering the silver/gold ratio to 57.8.
The price moves in precious metals were spurred by strong gains in the euro against the dollar. European stock markets went on a bull rampage with the FTSE up over 2 percent.
Analysts point to decisive action by the European Central Bank to break out of the austerity mindset and move the Euro-zone economy forward. The contrast with the U.S. Congress, mired in gridlock, was enough to convince investors that growth in the near future will more likely be found in Europe.
Since commodities trades are denominated in dollars, this has been all good news for precious metals. If the Euro-zone optimism continues next week, we’ll likely see prices move higher.
Where this gold rally can go wrong is if investors are underestimating the strength of the U.S. recovery. In spite of huge cutbacks in government jobs, the economy managed to beat expectations on employment numbers. There was enough improvement in the employment picture to derail any internal plans the Fed had to provide additional stimulus and stay with a wait and see approach.
If employment numbers continue to improve the investment world’s fickle infatuation with Europe could go sour in a hurry. If cash comes flooding back into the dollar, we could see renewed weakness in commodities prices.
Next week depends on whether you think the rally in Europe will continue. My read is both the progress in Europe and the buying supporting gold are fairly solid and there should still be room to the upside to the next support level at $1,620.
Trading is likely to be volatile over the next few weeks because traders have not had an opportunity to sell for quite some time. Look for profit-taking to kick in anytime prices move higher from here and more active buying on the dips.
As long as prices stay below $1,620, continue your small regular buys. If we get a big surge over $1,620, hold off on buying and watch for opportunities to convert.