The $ Rally, Will It End the Bull Market for Gold and Silver?

By: Julian D. W. Phillips | Wed, Dec 23, 2009
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This is a snippet from a recent issue of the Gold Forecaster with Subscriber-only parts excluded. We will not disclose our forecasts on the gold price except to Subscribers.

It has become clear to us that the media and so many institutional analysts are going to keep talking the $ up despite the lack of fundamental reasons. We feel that you will benefit most from a look at what lies ahead for the $ and its fundamentals and what could take it higher, if it does rise.

A Rally is due?

The main reason a rally in the $ is being promoted is because it is due for a rally. The same is being touted for the Pound Sterling. It is certainly true that a price never moves in a straight line. It is also true that investors, buyers and sellers must see trade around all levels to ensure they are balanced and accept price levels as convincing. When the market sees a price 'spike' you can be sure that sellers will turn up to bring it down. The only time it stays there is when buyers and sellers feel that, that price is justified by them both.

However, please note that the price of the $ is the main fulcrum of the currency world, a currency, unlike a share that is traded by an exchange. So its price doesn't move by buyers dominating one day and sellers the next. It stays in balance most of the time. That is why its fall from $1.23 to $1.51: €1 has been gradual. If it rises it is because of a distinct reason similar to a change of tide. So the concept of "just a rally" will not end the bull market for gold.

Is the € is worth more than the $?

When the $ rises, gold traders on COMEX sell gold in such a related manner as to try to establish a direct link between the € and gold. Silver follows. Of late we have seen that relationship broken then followed again. As the gold price has risen if has also risen in the €, thus de-coupling from the $. But the actions of short-term traders keep returning to the day to day moves of the $ against the €, perpetuating the belief that when the $ rises against the €, the gold price falls.

When the € was first issued it was roughly a 1:1 relationship to the U.S. $. It is now $1.4254: €1 this is a rise in the € of 42.5%. In that time gold has gone from $275 to $1,215 and increase of 440%. Do we now expect the gold price to move in line with the €? Why should it?

The Eurozone and the U.S. are at similar levels of development, their economies are moving in a similar path. The $ and the € are paper currencies are of a similar structure and reliant on similarly driven central banks. They have the same economic and currency goals. They are relatively inter-dependent. What will ail the one will ail the other. Hence the rise of one against the other is similar to a race where one runner is slightly ahead of the other. They are in the same race and the performance of one is not detrimental to the other. But the gold price is in an entirely different race, going a different way, moved by different drivers. We believe that this $; € and $: Gold ratio will fall away over time, just as in the past the oil: gold price fell away

Surplus holders will keep it high?

Of far greater pertinence is the attitude of $ surplus holders to the $. These are caught in a cleft stick, knowing that if they sold their $ surpluses that they would inflict losses in these holdings on themselves in the process of undermining not just the U.S. but the global economy. But each of these surplus holders in a different position regarding the $. All of them are caught in the cleft stick, but in this they will react in different ways: -

  1. O.P.E.C. oil producers are dependent on the States for the security of their sovereignty. The House of Saud dare not reject the $ oil price or they will lose the physical protection of the U.S. as will all those Western and Northern countries of the Persian Gulf. So they can only influence the $ oil price through supply influence to ameliorate the state of the $. However, this may be changing as we now hear the news of a new Gulf currency that may be used to price oil in. If this does happen, then a major nail will have been driven into the coffin of the $ as the global reserve currency.

  2. Russia needs to maximize oil income to keep itself economically sound. So it will accept the Yuan from China but won't reject the $ payments from other countries. It is diversifying reserves as far as it can without damaging the $ exchange rate [such as into gold] and would love to jettison the $, but for the sake of the value of its reserves and the stability of the world's currency markets, including the Ruble market, it won't. As one Treasury Official said, the $ may be our currency, but it's your problem.

  3. China is stuck with around $3 trillion in its reserves, firmly snared in the $ trap. It is unhappy with this and is diversifying as far as it can [including into gold]. Its unshakeable answer is to peg the Yuan to the $ and reap the benefits of sucking the manufacturing out of the States and selling it cheap goods, which are the first to be bought in a recovery. There will be no loosening of the 'peg' until the problem of China's $ reserves are solved. It is therefore turning the disadvantage into an advantage that is bleeding the U.S. of its strength. By doing this, the advantage of a weakening $ to the States is neutralized. President Obama's visit to China simply demonstrated that the Chinese were not prepared to budge on this. However, the Chinese did concede that they would not dump their dollars on the market. This would cause such disarray globally that the $ would collapse, but so may the global economy.

  4. Other nations, will attempt to absorb the weakening $ and where this is hurting them too much, will attempt competitive devaluations to keep some stability in their exchange rate with the $, where their trade levels with the States require it. €-dependent countries will move with the €.

Overall the world will continue to accept the $ and to some extent diversify into gold to "counter the swings in the $".

Will a recovery spark $ strength?

When the U.S. was at its strongest economically it drew in imports from the rest of the world particularly China and the cheaper producing nations. Consumers in the States are more aware than ever of the buying power of the $ in their shops. As their disposable income rises they will spend it on the cheaper goods that provide the same needs as the more expensive, usually home produced equivalent. It will only be when the States imposes tariffs on Chinese goods that this will change. At the moment this is unlikely. If it does happen, expect similar barriers to be set up for U.S. goods entering China. With China moving to economic self-sufficiency, it is becoming less vulnerable to dropping exports or potential tariff barriers.

So we do believe that as the U.S. recovery accelerates, imports will grow rapidly and so will its Trade deficit, thus undermining the exchange rate of the $ on international foreign exchanges still further.

Will Gold De-Couple from the $?

We have seen it do so many times and so expect it to do so not just again but eventually to be weaned off this relationship as short-term traders are made to suffer because of holding to it.

With the global economy struggling to recover and with so many dangers laying ahead, each one of them threatening uncertainty, instability and with international tensions growing, it is clear to most that the gold price is rising against all of these worries. It is not rising because of a falling $. It will not fall, except short-term, against a rising $. It would therefore be wrong to isolate the $ as the reason why the gold price either rises or falls, but it will continue to be the reason why the media in general records such rises and falls, because it is easy and story-worthy to do so.

The impact on the Gold price of a $ Rally or Fall
Subscribers only

We sent out a review of the gold market to Subscribers only, which reveals why the gold price is being held well above $1,000, where it will go next and how the gold market has changed shape due to the changes in overall central bank policies, from selling gold to buying gold. Subscribers should ask for this report and it will be forwarded to them, so perhaps you should subscribe?

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.

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