Gold Drops to $800, Why?
Friday, October 17, 2008 at 01:23AM
Gold Prices in Gold
Gold prices have not been performing as one would expect them to do in the current climate of financial crisis, failing to break above $920 and now dropping down to $800. This is because gold prices and the US dollar are inversely related, and we have seen a rally in the greenback recently. However, this is a false rally in our opinion, as it does not represent investors going to the USD, but moreover they are simply fleeing away from everything else. American stocks are being sold heavily which creates a demand for US dollars, and other central banks are cutting rates severely. The feeling is that at 1.5%, the Fed doesn't have the room to cut rates much more, but other central banks do since their rates are higher, therefore the US dollar is viewed as preferable relative to other currencies.

Despite gold's seemingly poor performance, the yellow metal is actually showing signs of strength. When the USD rallied to 80 and dropped back again, gold fell as low as $740. However the greenback has now soared to around 82.5, yet gold prices are trading at $800, $60 above where they were when the USD was at 80, and probably $100 higher that one would expect them to be trading with the USD at 82.5.

This shows the tremendous strength building behind gold, as it has held its value to a certain extent in spite of a rally in the greenback. As we have said, we expect gold to consolidate around $800-$850 before moving up to challenge $1000 towards the end of the year. We view gold as an essential part of an investors portfolio in the current climate.

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