If the dollar is no longer king then gold is going to replace it

by Peter Cooper, Arabian Money How do you read the recent strength of the US dollar and its fall back again after the news that GDP shrunk by 0.7 per cent in the first quarter? A classic double-top perhaps? Did the dollar top out in March with its spectacular spike to $1.04 to the euro followed by a five per cent crash? That was the conclusion of HSBC’s currency experts, with the proviso that something like the bankruptcy of Greece could still push the euro underwater again. So where do currency speculators turn for the next momentum trade? An increasing number of professional money managers think gold will be where the retail punters go to next and it’s true gold has been trading more like a currency than a commodity recently. If the dollar is no longer king, then gold looks like a worthy successor. Correction done For a start, gold is at the bottom of a correction of more than three years and attractively priced for an upward move. It topped out at $1,923 in October 2011 and seems to have bottomed out around $1,140 an ounce. Gold has actually already held up very well with the rise of the US dollar and came second only to the dollar last year in performance against all other currencies. Certainly, the many retail owners of gold in Germany have felt its benefit in protecting them from the 25 per cent depreciation of the euro. Indeed they have profited from it. When the dollar crashed by five per cent last month, gold was up two per cent on the same day. The best trade was selling the dollar and buying gold. Traders are always keen to spot a new trend. They create the momentum that carries prices higher. If the dollar has topped out and is now on the way down, then gold is coming off its recent bottom and going up. Gold was previously tracking the US dollar’s advance but has now decoupled and should go in the opposite direction. Gold is after all the classic hedge for dollar weakness. There’s another reason to think the price of bullion will surge from here. Goldman Sachs The argument that higher US interest rates are coming is what has kept the price of gold down. That’s what the Goldman Sachs research department has been telling us. Now that the Fed has taken its foot off the pedal for interest rates gold prices should no longer stay low. The April minutes of the Federal Reserve’s committee meeting hinted that a June rate increase is highly unlikely, though September could happen. Does it not begin to feel like traders are being strung along from one meeting to another? The reality of the US economic recovery also grows more dubious by the day. The March jobs number was half the expected tally. Consumers aren’t spending and housing market activity is subdued. The strong dollar is taking its toll on US exports and the oil price crash has crippled high- paying employers in the shale oil industry. Heading off in the opposite direction to Europe and Japan by raising US interest rates is hardly going to help this fragile recovery. Indeed, it risks crashing an already overvalued Wall Street. The Fed is going to move more slowly than advertised. It also reads these articles. Grexit or not? Then again, could the European economy pick up thanks to a lower euro, cheap oil and perhaps some unexpected progress in Greece? The bullish dollar trade has become so crowded recently that it is vulnerable to any good news from the eurozone, or could the dollar actually fall on a Grexit because all the bad news is already written into the euro? Once investors wake up to the fact that interest rates are actually going to stay low for much longer, then logically gold prices should be heading up and up. The threat of rising US interest rates to the gold price is gone. How much threat is there of the Fed raising rates when the US economy contracted in Q1 and could already be in a recession? A Greek exit from the euro and national bankruptcy may also be finally about to happen. That would be a hugely positive event for gold as a safe haven asset. Some experts say this will add $200 to the price of gold. Where else do worried Germans park their cash in a euro crash? Gold is about to have its run – as a speculative currency vehicle as the ultimate money that no central bank can print. Where do central banks go when currency markets give up on them? Back to the only true money and that’s gold.

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