Gold Fell Sharply in Dollars but not in Euros and Pounds

By: Mark_OByrne

Gold finished trading in New York on Friday at $825.50, up $15.80 and silver was up 37 cents to $14.81. Gold continued to rise in Asian and early European trading and is trading at $831.80/832.40 per ounce (1200 GMT).

The much anticipated bounce in gold occurred yesterday and continued overnight as the dollar weakened and oil prices firmed again.

Since the start of the credit crisis, one year ago, gold remains up 27% (from $650 to $830). It has thus outperformed all major equity indices all of which are down some significantly since the start of the credit crisis (see table).  With no end in sight to the credit crisis indeed there are many indications that conditions could deteriorate even more in the coming months, investors should be mindful of gold's outperformance and continue to focus on the long term. Risk aversion and wealth preservation should continue to be pursued.

Gold Fell Sharply in Dollars but not in Euros and Pounds
The recent sharp dollar rally is a contributory factor in gold's recent steep sell off. However, it is important to realize that the dollar's strength was more a function of concerns regarding the UK, Eurozone and global economy rather than any particular sudden confidence in the US economy and the US dollar.

This is reflected in the price of gold in terms of other major currencies including the euro and the pound.

British pound gold has only fallen from just over £500 in March to £444 pounds today or a decline of less than 13%. Euro gold has only fallen from €650 to €558 or less than 9% in the period.

Both charts look very healthy from a technical point of view and after healthy consolidations look set to continue their bull market in the coming months.

As central banks internationally are pressurized by inflationists (those who believe inflation is a not a bad thing and fail to realize the greater risks of stagflation and hyperinflation) to decrease interest rates to combat decelerating economic growth and clamoring for competitive currency devaluations, gold and silver will likely move up as strongly in euros and pounds in the coming years as they have already done in US dollars.

This is especially the case as the UK and Eurozone economies are increasingly being affected by stagflation which looks set to deepen in the coming months. Geopolitical risk is also being underestimated by markets and the increasing Cold War feel to relations between Russia and the West is likely to also dampen animal spirits in the coming months. Especially as Europe and the UK are massively dependent on Russian natural resources and a significant deterioration in relations could see more resource nationalism and the Kremlin using their resources as leverage against the UK and European countries this winter.

Today's Data and Influences
Today sees the release of US CPI figures for July and further signs of stagflation may be revealed. Economists expect a 0.4% rise compared with a 1.1% rise in June.

Gold and Silver
Gold is trading at $831.10/831.60 per ounce (1200 GMT).
Silver is trading at $14.86/14.90 per ounce (1200 GMT).

PGMs
Platinum is trading at $1503/1510 per ounce (1200GMT).
Palladium is trading at $319/323 per ounce (1200 GMT).

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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