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Is Gold Starting to Trade Like a Currency?

Commodities / Gold and Silver 2010 Mar 12, 2010 - 06:28 PM GMT

By: Sol_Palha


Best Financial Markets Analysis Article"Remember when $25, 000 was a success? Now it is a garbage collector." ~ Frank Dane

At one point on Monday the Dollar was trading in the red and Gold which should have shot up was actually trading roughly 10 dollars lower. As the Day progressed both the Dollar and the Euro were trending upwards together while Gold continued to slide. The story below attempts to provide a reason for this phenomenon.

March 8 (Bloomberg) -- Gold prices in New York fell the most in a month on speculation that Greece's fiscal crisis will be resolved, reducing demand for the metal as a haven. French President Nicolas Sarkozy said that euro-region nations are ready to help Greece. The cost to protect against corporate-bond defaults fell to the lowest rate in seven weeks on mounting optimism that Greece will rein in its budget gaps.

"If the Greek situation calms down, people may not be as interested in owning hard assets," said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. "Gold is losing its momentum." Gold futures for April delivery dropped $11.20, or 1 percent, to $1,124 an ounce on the New York Mercantile Exchange's Comex unit, the biggest decline for a most-active contract since Feb. 4. The price climbed 1.5 percent last week.

Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, was down 1.5 percent in 2010 to 1,116.12 metric ton by March 5. Assets rose 45 percent in 2009.

"Gold is just listless," said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. "It's running into some resistance." Investors also sold the metal after prices failed to top $1,140, analysts said. Gold's intraday maximums have been lower for three sessions since touching a six-week high on March 3. 'Jump Ship' Full Story

One almost wants to laugh at the reasoning behind this story. In the past, the main reason for Gold's upward or downward move was always related to the dollar, but not because a small country like Greece was in trouble. We propose an alternative theory. The fact that the Euro and the dollar were at one point trading higher in tandem suggests that Gold is now being treated as a currency. Traders normally jump from one currency to another as they try to determine which ones are overvalued and which ones are undervalued. This is normal in currencies; we see this almost on a daily basis in the Yen, US dollar, Australian dollar, etc.

If this trend continues then in the short to intermediate time frames Gold could suddenly mount a rather strong correction because traders might decide that there are other currencies that could provide a better rate of return in the short term time frames. However, this possible short term negative pales in comparison to the long term benefit; if this is a new trend then Gold has just passed a significant mile stone in that it is now being treated as a currency. Up to now Gold has been viewed as a hedge against the evil effects of inflation and only those schooled in Austrian Economics or those who follow the hard money movement have up to this point viewed Gold as the ultimate currency out there. This new development suggests that the idea is now possibly becoming more main stream.

On Friday (march 12), we noticed the trend again. The dollar traded lower, the Euro higher and for the most part, Gold was either trending lower or treading water. Normally, it would have shot upwards the moment the dollar started to pull back. The longer term implications of this development if it is indeed a new trend are profound. The next time the world experiences a currency crisis, and it's just a matter of time before it experiences one (potentially with devastating consequences this time round) there will be a flood into Gold because it will now be competing with all the other currencies out there. Thus the demand for Gold could increase exponentially for it now will serve not only as a hedge against inflation, but it will also compete with all the other currencies. It could, in fact finally re take its position as the ultimate currency of all time.

Now back to the short term trends; we spoke of this before but the story below highlights the potential short term risks that the Gold market is currently facing.

Gold ETF's play a huge role in the price of Gold bullion and muted demand could result in trigger happy traders deciding to close out their positions. If prices should start to fall it could trigger even more to sell their positions in these ETF's potentially triggering a domino effect. These redemptions would in turn force these ETF's to sell some of their Gold holdings, which could have a significant impact on the price of bullion. The story below highlights some of these risks.

The WGC argued that demand showed signs of recovery towards the end of 2009, as jewellery and industrial demand picked up, offsetting to some extent the pullback in investment demand.

ETF demand was 85% higher for 2009 compared to the previous year at nearly 600 tonnes, driven largely by a strong performance in the first quarter. This demand dropped off sharply by the fourth quarter of the year, coming in two thirds lower compared to the same time a year earlier.

Jewellery demand in 2009 was 20% lower year-on-year, but the trend was steadily upwards, with three quarters of consecutive growth. Jewellery demand reached 500 tonnes by the fourth quarter compared to 336 tonnes in the first as the Indian market showed signs of recovery.

Central banks who are members of the gold agreement had sold just 1.6 tonnes so far out of a possible 400 tonnes, according to figures released in February. The gold agreement runs from September 2009 to end-August 2010.

There have been purchases of gold by central banks outside the agreement, with India, Sri Lanka and Mauritius buying gold from 212 tonne first phase of the International Monetary Fund gold sale programme. There is another 191 tonnes of IMF gold up for sale.

In January, there was a net disinvestment of 22 tonnes of gold from ETFs and some expect the February figure to be fairly similar to that.

By way of example, the South African gold ETF, NewGold, has been reporting divestments and the fund now stands at 1.598 million ounces of gold from 1.7 million oz in November last year.

Davis believes if the gold price remains above $1,000/oz investment demand will remain muted but if the price drops below that level annual demand for the product could fall to between 300 and 350 tonnes. In the three years before 2009, an annual average 280 tonnes of gold was absorbed by ETFs. Full Story

So we have two time frames to focus on.

The short to intermediate time frames suggest that Gold could still mount a strong correction, especially if this new pattern persists, where gold trades lower even when the dollar is pulling back. Also a drop in demand for the Gold ETF could have an impact on the price of Gold bullion.

Long term= If this pattern continues it suggests that Gold is being finally treated as an alternative currency. If this is true then going forward it is a very bullish pattern for when we are hit with another currency crisis (this will occur it's just a matter of time), the rush into Gold will be even more extreme as it will now be viewed not an old relic but as an alternative currency.


Gold has run into strong resistance every single time it has tried to trade past the 1140 mark. Secondly, it behaved very strangely on Monday and today (Friday, 12th march 2010) by dropping in the face of a lower dollar and this at least in the short term suggests that Gold is more likely to correct than trade to new highs. The weekly sell signal has been neutralized but not invalidated, and once it is activated again it should lead to a rather sharp pull back.

The most important development to pay attention to is that Gold might finally be trading as currency; if this turns out to be true then it has to be viewed as extremely powerful and bullish long term development. If Gold should pull back strongly, view it as blessings from heaven and add to your positions for it might be the last chance you get to purchase bullion below $1000.

Random musings

Most Americans still unprepared for retirement - survey

The percentage of American workers with virtually no retirement savings grew for the third straight year, according to a survey released Tuesday. The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute's annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans. Workers who said they had less than $1,000 jumped to 27%, from 20% in 2009. Confidence in ability to save enough for a comfortable retirement hovered at 16% of respondents, the second lowest point in the 20-year history of the survey.

"Americans' attitudes toward retirement have clearly tracked the economy the last couple of years, and that seems to be the case in 2010," said Jack VanDerhei, EBRI's research director and co-author of the survey, in a statement. The percentage of workers who said they have saved for retirement fell to 69%, from 75% in 2009.

While VanDerhei attributed the decline in current savings rates to job losses, mortgage problems and the suspension of corporate 401(k) matches in 2009, he said the economy isn't entirely to blame. "In previous years, there were a whole lot of people who had nothing to begin with," said VanDerhei. The gap between what Americans have saved and what they'd need for retirement is forcing workers to prolong their working years. Full Story

Clearly, the majority lived well beyond their means. It's not that they did not make enough to save, it's just that they spent more than they made because they thought tomorrow would always be sunny. In the Euro zone the household savings rate is at 15.8% of Europe, in China it is the 25%-28% ranges and in India it has now well past 30%. America is almost right at the bottom when it comes to saving; it has not even touched the 7% mark yet. One other factor to keep in mind is that during recessionary times the Savings rate in the US has always gone up, but as soon as things appeared to get better, the average Joe starts to spend more than he makes.

For years, we have been warning and advising our subscribers to live 1-2 standards below their means and for those who could deal with it to push it to 3 standards below their means. In real terms 1-2 standards below means living within your means, as most have never lived within their means. Thus you would only move below your real standard if you moved 2-3 levels lower. However, any move down is a move in the right direction. We also suggested that this money should have been deployed into long term investments such as Gold, silver, Palladium and other related commodities. Strong pull backs should have been used to deploy new funds. Continue to live 1-2 standards below your means, and deploy the saved money into hard assets. The problem going forward for those who have saved is dealing with the pain they are going to witness in the years to come.

Believe it or not the current situation is still decent in comparison to what lies in store for the unprepared in the years to come. Can this path be altered? Off course it can, nothing is engraved in stone, but for that to occur, the government would have to cut its debt down, drastically cut back on new expenditures, reduce services, close its bases all over the world and stop being the police of the world, etc., chances of any administration implementing these severe changes are very slim.

"People who live in glass houses should take out insurance." ~ Source Unknown

by Sol Palha

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at

© 2010 Copyright Sol Palha   - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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