Last week saw a momentous week for gold. The much touted second round of quantitative easing (QE2) from the US Feds sent stock indices and precious metals higher.

Just a few hours before the FOMC released their statement on Wednesday the gold price was briefly sold off. Then straight after the announcement the gold price took another sharp fall breaking through $1,330 per ounce (troy). From there it gradually regained strength and carried on through Thursday and Friday, ignoring the good US jobs data to reach a new all time high of $1,398.

In Monday’s trading the gold price smashed through $1,400 an ounce.

Is the dollar doomed?
The US dollar has slid into dangerously oversold territory once again, but this time there’s no reprieve in sight. So far this year gold has gained over 27.5 percent in dollar terms.

The Financial Times quoted Citigroup’s head of FX strategy, Steven Englander, as he highlighted the problems now facing the dollar…

“We think that reserve managers will contribute to the next stage of dollar weakness as QE2 confirms their worst fears about the Fed’s intentions and the quality of their reserves portfolios.”

“The Fed’s QE2 announcement, whilst not a shock, just serves to remind reserve managers that they will have even more dollars in their portfolio if they do not move aggressively.”

“The historical record suggests that under these circumstances they are very likely to become dollar sellers in coming weeks.”

What will benefit from QE2
As the dollar slides and inflation rises common inflation hedges could see a boost. Rare commodities and precious metals are at the front of inflation hedging methods… The gold price is once again being fuelled from excessive dollars.

In the currencies markets the Euro is also experiencing another bout of weakness as peripheral countries fail to inspire any confidence. But it should come as no surprise that the Chinese are buying up Portuguese debt. The dollar has been seriously undermined by the recent wave of Fed bond purchases. Diversification is the next phase.

David Hale of David Hale Economics in the Financial Times writes…

“The recent gold price rally is the first stage of a multi-year bull market that will drive the gold price to at least $2,000 an ounce by 2015… Potentially the most important new factor in the gold market is China. China now has more than $2,400bn of foreign exchange reserves, but only 1.7 per cent of this is invested in gold. … Some Chinese officials have publicly called for the central bank to purchase 10,000 tonnes of gold. … There is no way to predict the timing of China’s future gold purchases, but there can be little doubt they will create a demand for gold that will dwarf all other factors during the next quarter-century and guarantee large price gains irrespective of what happens to Federal Reserve policy.”

By Miles Banner
Gold Price Today

We leave you this week with a fascinating article forwarded to us by one of our readers, James. It’s a Bloomberg story that reveals the insatiable appetite for gold amongst central banks – Central Bank Gold Holdings Expand at Fastest Pace Since 1964

© 2010 Copyright Gold Price Today - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.