The US Dollar and Metals Prices
I just want to start my fist post by talking about US Dollar and Metals Prices. When investing in precious and/or base metals, you have to look at the relative strength of the US Dollar compared to foreign currencies. This will give you a basis and theory to trade with that you might not have noticed before. This is one of the factors as to why we didn’t see gold prices hold above $1,000 in March 2008.
Back in 2004, we saw gold prices start to break out above $400 as the US Dollar got weaker vs. the 5-year-old Euro. The ratio was EURO/USD $1.25, which means that for every 1 Euro you’d have $1.25 in USD. Over the next 3 years, we saw the US Gross Domestic Product (GDP) grow and the bull run of the Dow Jones Industrial Average from 10,000 to 14,000. What was also interesting was the strength – or lack thereof – of the USD. We saw a steady decrease in the USD relative to the dominant Euro as the spread rose from $1.25 to its all time high of $1.60. Gold started on its own rally from $400 to a record $1,000. Then something interesting started to happen: the US economy started reeling after a number of major banks started to collapse, and we started (what some analysts call) the Great Depression, Part II. You would think that gold would’ve started to move even higher as investors saw it as a possible safer investment than currency. The Euro started it’s epic collapse and it turned out their economic situation was a lot worse than ours. The Euro started to tumble from that high of $1.60 to the 2004 mark of $1.25. Gold followed suit, falling from $1,000 to under $700 in a matter of four months from July ‘08 to November ‘08. Gold has since then rebounded to above $900 as the economic situation has become worse. This has started another bull run in Gold that may take prices over $1,000. The USD started to level off around the $1.35-$1.40 mark to the Euro as it cannot possibly sustain the massive sell off we have witnessed in the last few months. Analysts are seeing the golden cross start to form on the Gold chart where the 50 day moving average crosses above the 200 day moving average. Gold needs to get above the short term resistance of $925. Once there is a solid close above, it may be “off to the races”.
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