What Should Investors in Gold & Silver Do Now? (Part II)

Source: Julian Phillips, GoldForecaster 12/04/2009

Adjustments to Ratios Influencing the Gold Price


The Oil Price

Some analysts in the past took the performance of the oil price as a direct guide to coming gold prices. We have believed that at best its influence was and still is indirect. It pointed a general direction when growth and speculation, prior to August 2007 was such that the oil price rocketed to $145 a barrel. As the bubble popped the oil price fell back to $35 a barrel, but gold didn’t fall. Now with Russia trying to sell as much as it can and OPEC keen to hold prices around $80 the oil price is ‘under the control’ of oil producers. In time, once the global economic recovery is established, growth in Asia together with the recovery maturing in the West will see demand outpace supply, taking the oil price up to new territory. But, until then its function as an indicator of future gold prices has been undermined.

The Dollar: Euro Exchange Rate

For most of this year and years before, the Dollar: Euro exchange rate was taken particularly by short-term traders as a direction finder for the gold price with, at times the gold price cleaving to the rate. Many times the gold price decoupled from the Euro as it rose against both, but on a day to day basis the Dollar still triggers moves in the gold price. Why? Inside the U.S. speculators and traders see this rate as being a measure of the value of the Dollar. It harps back to when currencies were complete measures of value. When the Dollar weakened, it was seen in isolation to other currencies, particularly the only other really major currency, the Euro. But now the true picture that the Dollar is the trunk of the tree that all currencies stem from is becoming clear. Consequently gold now has a record of moving up against all currencies. This is symptomatic of the structural faults in the monetary/currency systems. At the turn of the century the Euro price of gold was well below €300 and took some years to rise through this level, but now it has just broken through Euro800.
With China rising from insignificance to growing prominence the tensions rising from a Dollar-pegged Yuan and greater trade tensions on the way the time for another global currency to barge into the world scene has come. This promises some ruptures and ructions to the extent that it is now prudent to retain and or buy gold for national reserves and for investment protection against currency swings. A future of uncertainty and lack of global cooperation is on the horizon. So what relevance does the Dollar: Euro exchange rate, have on this scene? Why should the gold price move with the Euro?

The breaking away from this ratio is more significant than gold’s relationship with oil. This break takes gold away from all currencies and places it as a measure of the entire system.
While we do expect the markets, particularly in the short-term, to take time to be weaned off this relationship, it has, is and will happen.

Changed Direction

This leaves gold in a new world. This was what drove the gold price up to $850 the first time. This time those central banks, which control the world of money are now turning back to gold. Where will they be happy to see gold? And in what role? We will have to wait and see.
It is incumbent on all of us who follow the gold price and its influences to re-address these changes in the gold market and to adjust to this new shape and new future.