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« Rio Narcea Gold Mines Ltd: Watch | Main | Canarc Resource Corporation: Interesting! »
Monday
Apr022007

USD Fall to send Gold Prices Rocketing

Gold prices continue to rise steadily as the price forms a healthy up trend.

Gold Uptrend Still Going Strong

Gold prices could be preparing to go a lot higher very quickly. It was around this time last year that investors saw gold prices skyrocket as gold gained hundreds on dollars in just over one month. This rise in gold prices saw many stocks double in price generating some amazing returns for any investors smart enough own them and sell at the top. The majority of investors however, would have sold on the way down, or even at the bottom of the drop.

It is vital that one does not make the same mistakes again and although every investor dreams of selling his/her shares right at the pinnacle of the rise, this is not always possible. A wise investment strategy would be to sell small proportions of stock or bullion all the way up, in order to lock in any gains that you have made. The capital produced by these sales should be saved in order to reinvest after the correction and acquire the same gold stocks or bullion at a considerable discount.

The continuously declining US Dollar is still one of the main drivers behind rising gold prices. Last year, in the period that saw a run in gold prices to $720, the USD index declined over 6% and today the US Dollar is falling still further will be one of the key reasons powering gold higher in the coming month or so around. Looking eastwards it is no wonder that China is looking to diversify its USD holding of over $1 trillion. A loss of over 6% in one month represents a loss of more than $60 billion to the Chinese, that's over $2billion everyday.




Currently, the USD is looking more and more unhealthy everyday. It is slightly ironic that we talk of the value of the USD going up and down; when the truth of the matter is that the USD is a fiat currency that is fundamentally worthless, it has no value at all! But in a world where paper money is still accepted in exchange for goods of real value, such as commodities, one must keep an eye on how valuable the market views this worthless currency.

USD limited by 200dma

As the chart above shows, the USD continues to fall lower, unable to break above its 200 day moving average, that it fell below in April 2006, whilst gold prices powered to 25 year highs.

A key level for the USD index is said to be around 80, and the whole world is watching, some eager, some anxious, to see if the USD hits or worse, breaks the 80 level

80 could be Key for USD

The most significant aspect of the 80 level is that it is uncharted territory. Once the USD moves lower than 80 sell signals will be flashing all over everyone's USD charts, because once lower than 80, there really is no limit on how far it could fall. That said, it is likely that we will see the US government rushing to the rescue of the USD, lead by Ben Bernanke and his “Plunge Protection Team”. Even so, the fact that the USD has breached the 80 level is enough to destroy a lot of confidence in a currency where confidence is already rapidly diminishing.

From October 2004 to the end of the year, the USD lost 7.52% in value, an extreme fall. Around April last year, the USD lost about 6%, so what if we were to see another similar decrease over the coming period?

Well, even if we use the smaller percentage decline of 6%, we would see the USD falling from its current level of approximately 83, to 78.02. This is the dramatic drop that is needed to push to USD dollar over the edge, past the key support at 80, and into the abyss. This in turn would be the perfect motivation for gold prices to run up past the highs of last year and possibly to form an all time new high. In the same time that the USD fell 6%, gold rose an incredible 27.5% with many gold stocks doubling in the same period.

So if gold rises another 27.5% from its current level of about $660 we would see gold prices of over $841! That would put gold near an all time high and in all the financial and world headlines, and this is assuming that gold rises in the same way as it did last year, not taking into account that gold could rise much, much higher, especially if the 80 level is breached by the USD.

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Reader Comments (4)

John Crudele, respected columnist in the NY Post, points to the forthcoming April jobs number(due in early May) as a rationale for the Fed to raise rates. Crudele cites the jobs number as contrived one, based on pure Labor Dept. guess work, and national birth/death ratios effecting new start up companies. He also mentions that March and April, are, tradionally, extra high numbers, based on these cockeyed formulations. If they raise, say goodbye to the weak mortgage market and collaterized debt obligations held by institutions in the hundred of billions, and down goes Gold, up goes the dollar.

Can you comment on Crudele's position? (See April 9 NY Post)

April 10, 2007 | Unregistered CommenterW G Reed

Sam,

You are pretty irresponsible in sending this kind of BS around the world and trying to soak up their hard-earned pennies from countries like India into US gold stocks. China is not stupid in parking their $1T in US. They are waiting for exactly the scenarios that you are fear-mongering about, but they are predicting the implosion of Dow Jones. They are for a buying spree waiting to move into bargains like the dying manufacturing sectors such as oil and gas, and most importantly, the auto industries in the US. Imagine if Ford goes down to penny range, it will be picked up by China in no time. So China's $1T is still hedged against a USD plunge given their unique goals and objectives. Yet, US still owes them a big favor as they stay put instead of pulling the plug like Japan and other countries would do.

I hate to see the Indians' solid gold jewelries converted to ETF's and evaporated overnight at the mercy of the jitteries around the world. But this scenario would not happen as India is not stupid either. The worst case scenario is what you said becomes perfectly true, but fails to produce the trickle down effect of stirring the kind of speculative non-physical economic activities. Then a good chunk of the paper money simply evaporates in seconds leaving hundreds of thousands of large institutional jitters in total bankruptcy.

Finally, the reality check is, every country in the world does not want to see the USD plunging even though some do like yourself. Because no USD means no US military and therefore no stabilizing forces to counter terrorism in this world. If USD does plunge, the first ones to buy gold to hedge their 100% USD denominated assets is the US citizens, not the citizens of those strong currency countries such as India or Canada. Have you heard Bush sending the instruction to US citizens to buy gold yet??

You said the paper money is worthless, but in essence, the metal is no better either. It is all relative. By the way, Japan only has $16B worth of gold in reserve. Their USD reserve is next to China! So no more doom and glooms!!!

Cheers,

John

April 11, 2007 | Unregistered CommenterGold Prices

John,

China has not "parked" their wealth in USD, they did not choose to hold $1T USD, but they simply ended up with it as result of China's trade with the USA and US consumers buying goods made in China.

China may consider placing some of its USD reserves into US industry, such as oil, gas, metals etc but I cannot see them buying companies like Ford or GM. I see no reason for China to buy a dying manufacturer of cars when they are more than capable of beginning their own car industry in China.

It is true that there are many countries that do not want to see the USD fall, but that is the reality of what is going to happen and it is happening already. The reason these countries do not want to see a USD decline is because they have large amounts of their wealth in USD. So as the USD is rapidly declining, these countries (especially ones like China) will be looking to diversify out of USD and into things that do not lose value, such as gold and the other precious metals as well as other natural resources. In fact China has already stated that they intend to move out of the USD and they may have begun to already.

The end of the USD may indeed mean the end of the US military and the end of a stabilizing force, but this does not mean that there will be know other stabilising force. The USA has seen its last days as a superpower and we are seeing the power shift eastwards, over to China, India and even Russia to a certain extent. The changing of super powers in nothing new, it has been going on throughout history with power moving all over the globe like think of Egypt, Persia, Greece, Rome, this is just another shift in power in many shifts that we have seen over thousands of years.

The reason that metals are better than fiat paper currency is because one cannot print more gold, as you can print more dollar bills. Paper money started out as a way to exchange wealth without carrying lumps of metal around as all paper money was backed by gold. Now the gold standard has gone and this money is nothing but paper so it is essentially worthless. People across the world are seeing their dollars become worth less and less and so they are moving into things that are not worthless such as gold and this is sending gold prices higher.

Regards,

Sam

April 11, 2007 | Unregistered CommenterGold Prices

On April 10th 2007 W G Reed was right on the money when he said the US mortgage market and collaterized debt obligations will collapse and then gold will crash and the US dollar will rise. Why this is such a good call imo is because at the time I thought gold and silver would react in the opposite direction and go through the roof. That didn't happen and gold went to 700 and silver to 8 dollars. We could have made a lot of money if we had the insight of Mr Reed. Keep up the good work, best rgs, ies

December 12, 2009 | Unregistered Commenteries

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