Gold Down on Fed Statements

Wednesday, 21 May 2014
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Published in Gold Investing
Gold Down on Fed Statements Wikimedia.
Gold dipped below $1,300 in mid-week trading, with the shiny metal down $3.78 to $1,290.20. Silver was up a penny to $19.41, bringing the Silver/Gold ratio to 66.5, still far above more sustainable ratios in the 50s.

Positive-Pullback

It should have been a better week for gold and, like every dip under $1,300 so far, I don’t expect this one to last very long. India announced that its government was easing restrictions on gold imports, news that should have been and, I believe still will be, good news for gold in the near term.

Comments by the Fed chairmen left equity markets down and put investors in a grumpy mood. Equities recovered smartly mid-week after a down trading day on Tuesday. A slew of economic data is due out at the end of the month, which will provide more clarity about the state of the economy — but the sell-off in equities on Tuesday now seems more like a protest vote of the Fed signalling an eventual end to liberal money policies.

When the headline breaks that America has dropped to second place, the markets will crash along with the dollar — and gold prices will surge.

The renewed buoyancy of the equities market moved the Dow/Gold ratio back to 12.8, still considerably over the historical equilibrium of 10. Gold is most certainly not overpriced compared to equities, and the reasons for gold’s meandering price performance clearly lie elsewhere.

While the economic numbers are good, they’re not as good as they’ve been the last two years. Still, the market seems overly pessimistic, with the Fed previously stating that a rise in interest rates was not on the agenda until mid-2015. If inflation, as the Fed measures it, stays in line with the 2% figure, there will be less incentive for the Fed to advance that timetable.

Gold traders should be looking past the next two years to the day, very quickly approaching, when China takes over as the world’s largest economy. The financial analysts sounding that alarm are few and far between, and the US appears to be sleepwalking right into that headline, which could come as early as 2016. It's not a kooky conspiracy theory: when the world wakes up to the news that the US is number two, the impact on the dollar will be dramatic.

The only reason the US as the number two economy may have a slightly less disastrous impact is the rest of the world likes the Chinese far less than they like us. The Chinese have earned a reputation as currency manipulators and industrial spies, not exactly endearing qualities in the fields of investment and banking. All the same, the financial repercussions will be significant — and an overall positive for gold prices.

It’s hard to fathom why most of the financial world is overlooking what will unarguably be one of the milestone events in economic history. Perhaps a focus on short-term returns and quarterly numbers doesn't leave time to think about the broader implications.

For gold traders, that makes price dips like the one this week a no-brainer opportunity to be fortifying their hard asset allocation. This is the third time in just a few weeks that the market has presented an opportunity to buy gold under $1,300. Hopefully this opportunity doesn't pass you by this time. When the headline breaks that we’re number two, the markets will crash along with the dollar and gold prices will surge. I don’t think our economy will collapse — but the shock will be intense, and just the psychological blow will be staggering. The time to prepare for that financial future is right now.

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