Movements in Gold Silver Prices Lackluster: A Potential Storm in the Brewing.
Gold Silver prices are currently trading range bound but precariously close to major support levels which have earlier triggered multi month rallies. Mid term charts indicate sharp & large upside rallies in Gold Silver prices but the longer term & more influential charts indicate weakening of the prices of these precious metals – though not for very deep corrections, as of now. Extremely Deep corrections will come much later on.
Traders not positioned for the fresh Gold Silver price movements may sorely miss the gains. Gold Silver Price movements have remained lackluster despite the recent state of financial disparity in Europe & all over the Globe in general. It’s probably the calm before the storm – as the saying goes.
Gold Price movement: As repeatedly alerted, on any negative news for Gold prices, sharp corrections, on momentum below $1630 to the ONCE very strong $1540 levels cannot be ruled out. The level of $1540 has repeatedly been tested & may not hold onto its strength this time.
Downside Risk: Gold will remain Range bound till above $1540 & below $1652.50. A sustained breakthrough below $1540 on a closing basis may open grounds for Gold to further fall freely to 1441, $1360, $1279 & then possibly to $1180 also.
Upside Potential: Only a break in Gold Prices with sustained momentum above $1652.50 will trigger Bullishness & then rises to $1686.25, $1747, $1783 & $1819 may also be seen. The level of $1652.50 is now crucial in Gold for further yearly Bullishness. Our final long term Target of close to $2200 may soon be seen then.
Silver Price movement: A decline below $28 could trigger declines to $27.55, $27.10, $26.74 & to a very strong support of $26.20 also.
Downside Risk: Silver will remain Range bound till above $26.20 & below $31.60. A sustained breakthrough below $26.20 on a closing basis may open grounds for Silver to further dip to $24 & any momentum below this would make Silver fall freely to $22.15 & to $19 also.
Upside Potential: Only a break in Silver Prices with sustained momentum above $32.05 will trigger Bullishness & then rises to $34.30, $36.10 & $37.54 may also be seen. The level of $34.30 is now crucial in Silver for further yearly Bullishness & to cruise swiftly to New Highs above the $50 mark.
The world has been blowing negative news from all corners recently, from rating downgrades all around to debt re-payment defaults to bankruptcy & political instability. There can be a breather overdue for some time.
If the recent large bailouts & positive developments for economic improvisations as explained below (though temporary in nature) work out as expected, financial markets may rise. If an upside price movement is seen, then Silver may move upside first on its dual demand – as an industrial Metal & as Bullion investment. Silver price rises have lately been limited on continuing rises in mine supplies as Mining Companies are striving to capture prices that are yet high by Historic comparison. Gold may remain sideways up with a positive bias due to the Euro rising – in such a scenario. Gold will surge aggressively a bit later when huge negative developments occur as is obvious with so much of debt burdens (explained in my earlier posts).
China cut benchmark rates on June 7, while the European Central Bank could take Crucial action at its July 5 meeting. The Federal Reserve on Wednesday extended its latest monetary stimulus program to replace short-term bonds with longer-term debt by $267 billion through the end of 2012. Emerging countries boosted IMF’s Emergency Funding to $456 Billion. Merkel and EU leaders reportedly agreed to allow 2 European rescue funds to buy back troubled bonds in Spain & Italy in a $950 billion deal. It will be the first time that bailout funds are directly used for Spanish debt. This move represents a sharp policy shift for Merkel, who strongly & repeatedly opposed using Euro zone’s rescue fund for the same earlier. Greece may get fresh bailout funds as the Samaras led pro-bailout party has recently won elections & also averted an exit from the Euro. Rising Inflation will remain cause for worry but will also eventually drive investors to safe heaven investments as a hedge against inflation, triggering upside for Gold later in the bargain.
Gold to eventually benefit from the soon-to-come QE3 & will remain a liquid safe haven in the event of financial fallouts, disruptive political climate from all around the Globe & will effectively hedge against currency devaluation and debasement. Central banks, the world’s largest holders of gold, may buy more of the precious metal this year than the purchases of 456 metric tons in 2011 as countries diversify their reserves, according to the World Gold Council. Central banks are expanding reserves for a third straight year as prices head for a 12th consecutive annual gain.
Turkey expanded its gold holdings by 29.7 tons in April, data on the International Monetary Fund’s website showed. Ukraine added 1.4 tons to bullion reserves, Mexico increased them by 2.9 tons and Kazakhstan’s gold holdings climbed by 2 tons, the data show. Emerging economies want to increase their holdings as gold has been relatively under-owned by them & keep buying gold regularly during economic turmoil.
Gold as an asset class: Gold is held in many forms, by numerous governments and billions of individuals. The willingness of all these parties to change gold for paper currency and vice versa is what determines the price of gold in relation to each different paper currency respectively. Not only is it incorrect to try and analyze the gold market as if it were the same as other commodity markets, there is no historical precedent for it either.
Prior to World War I, the world was on a gold standard and hence gold was money, not a commodity. Between World War II and 1971, the world was on a quasi gold standard, using the US dollar as its reserve currency while the US dollar was convertible into gold.
Thus, for our entire history up to 1971, gold was always thought of as money and not a commodity. As soon as governments ceased to determine the gold price by decree, its price increased from $38 an ounce to $850 an ounce. Was this increase due to a supply deficit? Of course not!
And when the gold price decreased from $850 an ounce to settle in a trading range around $400 an ounce, was that due to a supply surplus? No. The increase in the gold price from 1971 to 1980 was due to the massive inflation of US dollars that was never reflected in the gold price because the US Government arbitrarily set the price of gold. The ensuing decline was because the gold price overreacted, as investors scooped up all gold related investments in the belief that the gold price would never-ever decline again, much like today’s stock market investors.
The value of annual gold derivatives trading is twice as much as the total amount of gold that has ever been mined, and this figure is based on a conservative estimate of the ever rising size of the derivatives market. But only about 5,000 tonnes, or 4% of the total amount of physical gold, changes hands every year. It is obvious that the physical gold market is absolutely dwarfed by the size of the derivatives market for gold. It is logical and inevitable that the derivatives market, not the physical market, determines the price of gold.
The key to understanding the gold price is to understand what drives the price of gold in the derivatives market. Exchange rate prices are subject to the same supply and demand fundamentals as any other object of trade. An increase in the supply of dollars would cause its price to decline (the dollar devalues) while an increase in demand for dollars would cause its price to rise (devaluation of other currencies by comparison to the dollar). The United States has run a trade deficit for almost every year since 1970. A trade deficit means the United States imports more than what it exports and so, on a net basis, dollars move out of the country. This flow of dollars out of the United States, an increase in the supply of dollars, puts downward pressure on the price of the dollar relative to other currencies. Again, total supply must equal total demand, and so the US trade deficit has to be offset by an equal amount of net foreign investment. The total amount of net foreign investment, actually also covers net income receipts or payments as well as net unilateral transfers. The value of the dollar on foreign exchange markets is thus dependant on the demand for dollars to pay for foreign investments in the United States in relation to the supply of dollars as a result of the trade deficit. Therefore the willingness of foreigners to invest in the United States is critical to the value of the dollar. The relative size of net foreign investments into the United States versus the trade deficit gives an indication of foreigners’ willingness to fund the US’s trade deficit. It is therefore reasonable to assume that when worldwide conditions change, and the perceived risk outside the United States diminishes, a considerable amount of foreign capital will leave the US. This will cause the US dollar to decline and the dollar denominated price of Gold to rise.
The price of gold varies depending on which currency it is quoted in. Not just in absolute terms, but in relative terms as well. The gold price is specific to each individual currency. It has been shown that the gold price is far more sensitive to changes in foreign exchange markets than fluctuations in annual mine production or jewelry demand. This is due to the fact that gold is money; it always has been and still is today. Buy Gold and Gold stocks while the US dollar is abnormally strong and Gold is historically cheap in terms of US dollars for a large & sharp upside price swing which may again not last long enough, as seen in 1980 also.
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