Gold Soars as the Dollar Weakens

On Monday gold managed to touch a fifteen-month intra-day high of $1,300 per ounce, then settled for a close at just above twelve hundred ninety-three. A solid break-through beyond the thirteen-hundred-dollar mark, widely observed as a key resistance point for the yellow metal, now seems like a virtual slam-dunk. Gold is clearly on a serious upward trajectory.

The principal catalyst behind gold’s energy was the U.S. dollar.  According to Afshin Navabi, head of trading at Swiss precious metals and financial services group MKS:

“The dollar was the reason behind the spike up (last week), and we broke all the important levels on the upside ….$1,285 was a huge number, and we got through $1,290 pretty easily. $1,300 is going to be a very important one, so we shouldn’t go through that easily.”

The dollar also slid against the Japanese yen. That currency relationship turned in its weakest performance since 2008, perhaps due to the fact that in April the Bank of Japan decided against further quantitative easing.  Then again, the dollar’s lost ground against most of its sister currencies. In fact, it tanked against the euro for the sixth day in a row.

Several economic forces are at work here.  For one thing, the country’s stagflation is leaning on the greenback. Manufacturing in the United States is in its longest recession since 2009, while Europe is exhibiting signs of recovery. And traders and investors have widely regarded the Fed’s delay in increasing interest rates as a shortcoming, if not an outright lapse in commitment.

Hedge funds and other big guns have rolled out their biggest play in almost two years against the U.S. dollar versus eight of its counterparts. And MKS’s Navabi remains very optimistic about gold and precious metals in general:

“The dollar is very weak, especially against the yen, and the white metals all look very healthy, so maybe on the back of that gold may get a bit of a follow through,” he said. “We should have a bit of back and forth between $1,290 and $1,300, but I think we’re heading for new numbers on the upside.”

Many institutions, like Commerzbank, share Navabi’s enthusiasm for gold in our difficult economy.  And last August, even the pundits at Goldman Sachs, who have consistently purported to be bearish on gold, purchased over three tons of the shiny metal.  As securities attorney Avery Goodman wisely observed back then, “Investors should do as the banks do, not as they say.”

If you haven’t gotten into the physical gold market yet, you might want to do some serious thinking.  I spoke to a man the other day who told me he’d feel guilty if he invested in gold.  He seemed to feel, by doing so, he’d be betting against the dollar.  I asked him whether he believed in life insurance, which is hardly betting against your own good health.  Last time I checked, looking after your family’s security is as American a move as wearing your baseball cap backwards or eating a hot dog.

And frankly, it’s not betting against Uncle Sam to guess that his paper money may lose buying power in the next thirty years, while gold has retained its value over centuries.  Retirees are living longer than ever; you need your funds to last for decades to protect you.