Gold has so far enjoyed a rather interesting session this morning as the market is trying to digest the results of the European Central Bank meeting held today. After rising sharply to about $1755 per once, the market then sold off just as fast to trade as low as $1712. What’s fascinating about these two moves is that they really occurred as a result of the same news being interpreted in different ways…I know it’s strange but bear with me.
In this morning’s ECB meeting, the key interest rate was cut one quarter point to 1%. This is exactly what most analysts expected. The result was a short term increase in gold prices which mirrored the Euro and the weakening dollar. This lasted all of about 15 minutes. What proved to be more important than just the rate cut is the lack of language from the ECB indicating a more aggressive monetary stance and bolder move to stem the EU debt crisis. After a closer inspection of the meeting notes, the markets sort of changed their mind and ran in the other direction, dragging gold down with them.
Gold finds itself in a bit of a bind at the moment. If the EU does nothing to stop the spreading crisis, gold can suffer in the short term because of the strengthening of the US dollar that will result from ongoing instability in the Euro. If on the other hand the EU acts too boldly, overly loose monetary policy in the Euro Zone could drive the Euro down as well which would have the same effect. So what is gold looking for? At the moment, a short term positive environment for gold is a EU policy that is bold but not excessive. It must not be too cold, or too hot, but just right! The metal has not found that sweet spot so it remains range bound at the moment.
On the other hand, this seesawing trend can change quite quickly and it’s probably a good bet that it will. Gold has simply lost its way as it consolidates and looks to the dollar for signals as to when the embattled currency will resume its downward spiral. I say when and not if simply because of the unimaginable expansion in the US money supply that has occurred over the last several years and continues at this moment. These short term woes in Europe have bolstered the dollar as a safe haven, but have done nothing to mend its hideous fundamentals. Likewise they have damaged gold’s short term performance. They have done nothing to weaken its tremendously bullish fundamentals.
There is a good precedence for what we are seeing at the moment. In the latter part of 2008, gold prices suffered a very similar pattern on the heels of the global banking crisis. Like today, the dollar strengthened significantly for a while which drove gold into the doldrums for several months. Shortly thereafter, gold and the dollar both succumbed to their long term fundamentals and the metal resumed its march upward with more fervor than ever before. Take a look at these two charts:
In the 2008 chart you’ll see a sharp rise occur in September, followed by a double top formation, followed by a steep correction which led to range bound seesaw trading through the end of the year. Now look to the 2011 chart. You can see the same rise (this time in August) followed by the same double top, correction, then the trading range. It’s almost spooky how similar these patterns really are.
Now let’s look to one final chart:
This is what happened in 2009, after the range-bound finish to 2008. Just when gold was looking trapped in a wishy-washy trading range, it broke out and tacked on 35%+ the next year.
The point is that like the banking crisis and the Lehman Brothers collapse, this EU debt debacle is driving the dollar up in the short term which has put the shackles on gold prices. Gold is responding exactly as it did in 2008. History is not a perfect indicator, but if the pattern continues to resemble what we saw three years ago, there could be very significant gains in store for 2012. Unless you can make a good argument that the dollar is trading this high on its own merit and not as a short term reaction to uncertainty, a strong year for gold in 2012 is a reality you’ll just have to accept.
Mike Getlin is Executive Vice President of Merit Financial, home to America's fastest growing physical gold IRA company. Please send comments or questions to email@example.com.