Gold and Silver's Daily Review for 19th October 2010

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Treasury Secretary Mr. Timothy Geithner started yesterday that the U.S. would not devalue the dollar to increase its trade competitiveness.   This, mistakenly, has led commentators to believe this is part of his "strong dollar" rhetoric.   Over the years, the U.S. has reiterated that it wants a strong dollar, but has done absolutely nothing about it.

The statement yesterday follows the same pattern.   The very structure of the U.S. Balance of Payments was built on the U.S. being the dominant economic world power with its currency the sole reserve currency worldwide.   The last three years has seen that position fade as China rises to take a chunk of that wealth and power.  As we see the U.S. become more and more dependent on China and other emerging nations for capital investment into the U.S. to counter the persistently large trade deficit, the ability of the U.S. to maintain a 'strong' dollar lessens.   But Mr. Geithner is accurate when he says that they won't devalue the dollar, they don't have to.   It is a consequence of the structure of the U.S. that it will happen inexorably.   In addition, China is trying to diversify away from the dependence on the U.S. dollar and soon will structurally change that dependence.   Sad to say, the impact of Mr. Geithner's words will be short-lived.

Meanwhile gold fell overnight in Asia down to $1,358 an ounce and the dollar stands at $1,3868: €1in London the Fix at $1,367.7 or €981.099.

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Gold – Very Short-term Gold should consolidate today again, subject to new news.

Silver – Very Short-term Silver should consolidate today again, subject to new news.

Gold Price Drivers

The story of the day remains the U.S. dollar.   As you can see, the gold price in Euros is at the top of the recent trading range of €981, but still off its top.   The gold price for the last few days has moved up and down in line with the dollar's moves down and up.

Government rhetoric always has a temporary effect on traders and prices, as is the case today.   However, fundamentals have not changed.   What we are seeing at the moment is the usual ebb and flow of prices day by day.

What we have to understand is that the gold price is being driven by currency, capital flow, global macro-economic considerations, not by traditional gold demand from jewelry, previously the mainstay of gold demand.   Indeed, investment demand has to keep prices sufficiently high to deny the jewelry trade acceptable prices.   We believe this might prove more and more difficult as the days go forward.

In the last week we have seen U.S. gold Exchange Traded Funds selling positions as the price corrected and so providing the big buyers with the gold they seek.   Subscribe to Gold Forecaster if you wish to better understand the gold market.

Regards,

Julian D.W. Phillips