Gold Price Plummets on Leap Day...Silver Too
Actually, all the precious metals' prices dropped on "Leap Day" (February 29th). Silver the most, next gold, then platinum and palladium. The theory is that Bernanke's testimony spooked traders. Supposedly they wanted to hear Ben say that he was going to fire up QE3, but he didn't. At least that's what they say.
Whatever caused the drop, any big drops may rattle you - especially if you own gold. So you have to know a couple of things, unless, of course, you like being rattled.
First, I think we're going to see 100 point swings in gold this year on a fairly regular basis. I don't mean every other day, but 100 point swings won't be so rare. (Today's drop was over 85 at the close, but 100 intraday - exactly what we've been anticipating.) Get used to it.
Second, somewhere around 1765 seems to present an obstacle for gold's rise. It recently went over 1765. Then it got slapped down. My thought: it will work its way back up and make a few more stabs (1,2,3...?), then it will shoot past 1765 with sights set on 2,0000. We'll see what happens.
Now, if you can manage to lift your eyes from the pain of the present to the real story (the proverbial "big picture"), here's something that people aren't talking about much. It's the fact that the dollar is being used less in settlements. We're starting to see China, for example, transact with other countries without using the dollar as their means of settling the transaction. Prior to this, basically since the end of World War II, the US dollar was used in all international trade - first in the "Free World" before the fall of the Soviet Union and the opening of China to international trade, then in the post-Soviet world. That's one of the characteristics of a "reserve currency": it's used to settle trades.
When the dollar has to be used to settle international trade, that creates a massive demand for dollars. Now that some trade is conducted without using dollars, that demand is reduced. And there's every reason to believe that this trend will continue, which will result in lower demand for dollars.
And, as we all know, if there's less demand for dollars, the price of the US dollar will eventually go down.
Now note this. The measurement we typically see for the dollar is the USDX - the US Dollar Index. That index measures the value of the dollar relative to a basket of other currencies. If we see that value drop below 72 (it's over 78 now), we could see a dramatic drop in the value of the dollar relative to other world currencies (like the Euro, the Yen, the UK pound, etc.).
But the more relevant point here is that we'll see the dollar drop relative to the only standard that really matters: gold. That means we'll see the price of gold rise in US dollars. (You have to understand this relationship of the USD and gold. When the gold price goes up, more than anything else, it's telling us that the value of the US dollar is going, that is losing its purchasing power over time).
So that trend along with the more extreme swings in the gold price may be the two big themes for the gold price this year.
Whatever caused the drop, any big drops may rattle you - especially if you own gold. So you have to know a couple of things, unless, of course, you like being rattled.
First, I think we're going to see 100 point swings in gold this year on a fairly regular basis. I don't mean every other day, but 100 point swings won't be so rare. (Today's drop was over 85 at the close, but 100 intraday - exactly what we've been anticipating.) Get used to it.
Second, somewhere around 1765 seems to present an obstacle for gold's rise. It recently went over 1765. Then it got slapped down. My thought: it will work its way back up and make a few more stabs (1,2,3...?), then it will shoot past 1765 with sights set on 2,0000. We'll see what happens.
Now, if you can manage to lift your eyes from the pain of the present to the real story (the proverbial "big picture"), here's something that people aren't talking about much. It's the fact that the dollar is being used less in settlements. We're starting to see China, for example, transact with other countries without using the dollar as their means of settling the transaction. Prior to this, basically since the end of World War II, the US dollar was used in all international trade - first in the "Free World" before the fall of the Soviet Union and the opening of China to international trade, then in the post-Soviet world. That's one of the characteristics of a "reserve currency": it's used to settle trades.
When the dollar has to be used to settle international trade, that creates a massive demand for dollars. Now that some trade is conducted without using dollars, that demand is reduced. And there's every reason to believe that this trend will continue, which will result in lower demand for dollars.
And, as we all know, if there's less demand for dollars, the price of the US dollar will eventually go down.
Now note this. The measurement we typically see for the dollar is the USDX - the US Dollar Index. That index measures the value of the dollar relative to a basket of other currencies. If we see that value drop below 72 (it's over 78 now), we could see a dramatic drop in the value of the dollar relative to other world currencies (like the Euro, the Yen, the UK pound, etc.).
But the more relevant point here is that we'll see the dollar drop relative to the only standard that really matters: gold. That means we'll see the price of gold rise in US dollars. (You have to understand this relationship of the USD and gold. When the gold price goes up, more than anything else, it's telling us that the value of the US dollar is going, that is losing its purchasing power over time).
So that trend along with the more extreme swings in the gold price may be the two big themes for the gold price this year.
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