International Politics Will Continue to Affect Gold Prices
Amid fears of a double-dip recession and looming currency war, the super-rich are looking for ways to preserve their wealth. They found the answer in gold. Banks that cater to the world's richest individuals reveal that some clients are moving money out of the financial system – and into gold, sometimes buying by the ton. Josef Stadler from UBS said that "They don't only buy ETF or futures; they buy physical gold."
As a result, the demand for physical bullion was significantly boosted. Gold is also doing well in exchange-traded funds while mining companies are seeing more action in the stock market. UBS has recommended their clients to hold between 7-10 percent of their assets in gold (we've been suggesting that our Subscribers hold more physical bullion than that). This precious metal has been on track for its tenth consecutive yearly gain. Many predict that it will hit $1,500 in a few months and we also see that level as a possibility. Other investments firms like Julius Baer are also saying that wealthy investors should park some of their assets in gold following concerns about currency weaknesses.
Concerns about the Gold Bubble Being Raised Again
In our previous article, we talked about investor concerns about the gold bubble. These concerns are well-founded. In fact, George Soros and Warren Buffet both believe that gold may be the "ultimate bubble" because it has no real value except its market price. Basically, it is only worth what people are willing to pay for it. This metal is uncompetitive in an environment with rising interest rates. Still, please recall that interest rates followed gold and silver higher in '70s bull market.
However, the continuous rise in gold prices can only be the result of greater demand from investors. The metal is seen as a way to hedge against likelier "bubbles" and a fresh recession. Uneasy outlook on major currencies, inflation, and global growth has triggered the gold buying spree. Its manifestations can be seen everywhere. A physical gold fund launched by Pictet just a year ago has already experienced a five-fold increase.
According to UBS's Stadler, this precious metal will remain in investors' portfolios despite concerns about its long-term prospects. For the super-rich, he explains that "if you talk to ultra-high net worth individuals, that level of uncertainty has never been higher in the last two, three, fours years." When he's asked about inflation concerns, he adds that there is no answer. Gold is a hedge against that.
For like any average investors, there are also a lot of high net worth investors who mainly want to capitalize on the rise of gold prices. Anthony DeChellis from Credit Suisse's Americas unit said that, "They're asking, ‘If it's a bubble, how far can I ride that bubble', I cannot say we've seen a spike in gold interest, but there's an interest in the phenomenon of it."
How the Dollar is Faring
In the long term USD chart (courtesy of http://stockcharts.com) below, we'll analyze how well the dollar is faring in today's turbulent environment.
Since there is a strong negative correlation between the dollar and precious metal, the implications for gold are bearish. In the chart above, we can see that the local tops should be close although double-tops should not be ruled out at this point. It would depend on whether the support level can stop the USD decline at 77 or it will move lower to 76. In our opinion, the former is more likely.
Meanwhile, Goldman Sachs expects that the dollar will drop to $1.85 against the pound in 12 months. The euro will also be affected with the dollar forcing it to $1.55 in the same period. US recovery peaked due to the stimulus package in the final three months of last year before slowing down.
Since summer produced weak economic data, many are convinced that the Federal Reserve should risk quantitative easing – or injecting more money into the economy – once again. According to Thomas Stolper from Goldman Sachs, "More QE is seen as a coordinated effort to get the dollar lower".
Basket of Currencies May Replace the Dollar
Several weeks ago, we talked about the Chinese's desire to end the dollar's dominance in the world market. Now, several news sources reveal that Middle Eastern countries, together with Russia, Japan, and France – want to end dollar dealings for commodity transactions, specifically for oil. Instead, they want a basket of currencies to be established. This would include the Euro, Chinese Yuan, Japanese Yen, Gold, and a Unified Currency from the Gulf Cooperation Council (headed by Saudi Arabia, Kuwait, Abu Dhabi, and Qatar).
Finance ministers from China, Russia, Japan, and Brazil are reported to have already held secret meetings regarding the scheme. Basically, they don't want oil to be priced in dollars anymore. These developments also help explain why gold price has experienced such massive increases recently. It is expected that if everything goes according to plan, the market will undergo a transition from the dollar within nine years.
United States officials are certainly aware of what's happening and they will fight it. However, the Chinese believes that the Obama administration is too busy boosting the economy to tackle this issue at this point. Its implications will be seen several years down the road. The decline of American economic prowess was implicitly mentioned by World Bank president Robert Zoellick. He said that "One of the legacies of this crisis may be recognition of changed economic power relations."
Ever since the Bretton Woods agreement has been drafted after the Second World War – US trading partners were left to cope with the hegemony of the dollar and Washington's ability to control the global reserve currency.
China also believes that it was the Americans that persuaded Britain to refrain from joining the euro – to prevent a move away from the dollar. This time, the Chinese said that the discussions have gone too far to back down. Russia will later bring the trouble into the basket of currencies. Meanwhile, Britain is stuck in the middle and might be forced to join the euro according to an official familiar with the talks.
If you are interested in knowing more on the market signals we analyze, we encourage you to subscribe to our Premium Updates to read the latest trading suggestions. We also have a free mailing list – if you sing up today, you'll get 7 days of full access to our website absolutely free. In other words, there's no risk, and you can unsubscribe anytime.
Thank you for reading.
Sunshine Profits Contributing Author
Gold, silver and mining stocks were rising rapidly since August, until yesterday, when correction surprised many Investors. Really? We are closely monitoring current situation and it seems that now we are close to the temporary turning point, so this week we are commenting on how we can take advantage of the possible consolidation, where it can take us – we have likely targets – and what will most likely happen after it is complete.
We further comment on currency war, its major players and finally on its implications for gold, silver and mining stocks. Euro, USD Indices and the general stock market are generating signals, which we are able to translate into precious metals language using our Correlation Matrix and other reliable tools.
The 20 charts featured in this week's Premium Update include: 5 Gold charts (also from the non-USD perspective with additional chart for gold in Japanese yen), 3 Silver charts, HUI Index, GDX ETF, our Correlation Matrix, USD and Euro Indices, and SPY ETF as a proxy for the general stock market, S&P 500, and the GDX:SPY ratio. We also let you know what signal to look for in order to determine the following turning points. We encourage you to Subscribe to the Premium Service today and read the full version of this week's analysis right away.