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.
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
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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