Gold prices recovered as the euro rallied on news that European Central Bank aid was already flowing to Spanish banks.
In early trading gold was up $8.20 to $1,595.80 and silver was up $0.24 to $27.55, lowering the silver/gold ratio to 57.9.
The news was generally good for commodity prices, except for oil which broke from the pack to move lower on the news that the oil strike in Norway was over almost before it started. Platinum, palladium and copper all moved higher in overnight trading.
The price moves yesterday were largely in line with currency fluctuations and the markets are largely unmoved by speculation about what the Federal Reserve may do. After being burned the last two meetings, the Fed is no longer figuring into precious metals pricing.
There has been some speculation among analysts that we are in a deflationary cycle for commodities and there is some evidence to support that observation. When global manufacturing slows down there is a tendency for raw materials to back up in the production pipeline. Mines can’t just flip a switch and slow production; there’s a bit of a lag between lowered demand and lowered production. Since commodities, like iron ore, are expensive to store and it’s not unusual to see a short-term depression in prices as the elasticity of demand backs up the production pipeline.
Going by gold prices we’ve been in a deflationary period since roughly September of last year, a pattern that’s repeated in the charts for gold, silver, platinum and palladium. The fact that gold prices are affected lends credence to the deflation theory as gold is not an industrial metal.
Quiet periods of declining prices are the time to add to your physical holdings. Silver is still attractively priced relative to gold and, considering silver is mined as a byproduct of other metals, prices have held up very well.
We could see deflation playing into commodity prices well into 2013 as changes in monetary policy can take up to 18 months to work through the system. Traditionally that influences some investors to delay purchases in anticipation of lower prices. But if you’re a retail investor in physical gold and silver, the overall decline in prices is not that significant.