Precious Metal Commentary

February 1, 2010

Gold Prices Fall Against Dollar, But Rise Against Euro

Gold fell further last week, mostly on the strength of the U.S. dollar, which hit a five-month high on Friday. The euro fell over 9% in the last two months, from $1.51 in early December to $1.38 on Friday, based on troubles in several euro-zone nations, led by Greece. However, this morning (Monday), the euro rose to $1.39 and gold recovered strongly. Even when the dollar is up, this just means that gold is rising in terms of other currencies, like the euro. Over time, gold is still rising in terms of all paper money, although various currencies take turns in falling faster.

• Gold 52 weeks ago (February 2, 2009): $918.25
• Gold's average price during 2010: $1117.96
• Gold's low for 2010: $1078.50 on January 29
• Gold's London high for 2010: $1162 on January 11

The Bottom Line: The metals were down again last week, but stocks are down a bit further than gold.

Why the Dollar is Rising Short-term, But Will Eventually Fall Again

The currency market is relative. All paper currencies are weakening in terms of gold, over time, but some currencies seem "less weak than others" in the short-term. Here's an example: In the global currency market, the three dominant national brands of paper are the U.S. dollar, euro and Japanese yen. By looking at the economies in Europe and Japan, you can get a good idea about why the dollar has risen.

The Euro: Should the European Central Bank (ECB) bail out Greece? That was the big question at the World Economic Summit in Davos, Switzerland last week. The ECB is asking China to buy up to 25 billion euros ($35 billion) in Greek bonds, but China already owns too many Greek bonds right now. And if the ECB rescues Greece, will Portugal, Ireland, Italy and Spain - the other "PIIGS" of Europe - be next in line at the trough? These nations can't print money, since their currency is the euro, so their bonds will have to offer higher "junk bond" yields in order to draw customers. Greek bonds are already over 7%.

The Yen: Last week, Standard & Poor's cut its rating on Japan's sovereign debt to "Negative." Japan has a terrible deflationary environment, which causes consumers to delay purchases, expecting lower prices. On Friday, Japan said that its consumer price index (CPI) fell by 2% in 2009, and the hopeful forecast by the Bank of Japan's policy board is now for price drops of -0.5% in 2010 and -0.2% in 2011. But Japan's central bank can't raise interest rates now, due to the fact that its cumulative budget deficit is so massive (bigger than America's) that any higher rates could fuel devaluation of the yen and economic depression.

The Dollar: America faces the same unemployment (10%) as Europe, and the same deficits as Japan, Greece and Britain, so our own Federal Reserve faces the same dilemmas as the central banks in Europe and Japan. The dollar seems doomed to fall again as deficits mount and the Treasury prints fiat money, but the reason why the U.S. dollar seemed so relatively strong in recent weeks is that the dollar is the "least weak" of the three major currencies. The dollar also rallied over the Senate's re-confirmation of Ben Bernanke at the Fed, since any uncertainty could lead to an exodus out of the dollar. (Treasury Secretary Tim Geithner is less secure in his job. Congress might need him as a scapegoat to throw to the wolves.)

Today (February 1), President Obama announced his proposed fiscal-2011 budget, which will spend $3.8 billion, seemingly belying his promise to "freeze spending" in discretional spending. His own economists predict that the 2011 budget will push the deficit to a record-high $1.56 trillion. There were bipartisan concerns aired. The dollar sank on this news, the dollar simply can't rise, long-term, if deficits continue in the $1.5 trillion-per-year range for long.

Our Response to the Bearish Case for Gold

All markets are entitled to "breathing spells" after a rapid rise, such as the precious metals have enjoyed over the last year. But the gold bears are out in force, once again. Whenever the metals fall a bit, the bears attack.

Swedish research group Raw Materials Group (RMG) states in its yearly forecast that the three key factors driving the [gold] price "are now history" and says that: "The fall of the dollar looks to be over for now, the move to more secure investments during the financial crisis has come to a halt as a result of the return of risk appetite."

"The fall of the dollar" is not over - as shown above, and in this morning's news reports. And there are no "more secure investments" than gold. Are stocks more secure over the last two years, or 10 years? No. They have gone down over the last decade. Are bonds more secure? Not with rising long-term interest rates nearly everywhere. Is real estate more secure? No: All indicators point toward falling prices in most regions in the U.S. Where are these "more secure" investments that the author cites but neglects to name? No, the case for rising gold in 2010 - its 10th straight up year - still look better than any other investment.

Important Disclosure Notification:

In the opinion of the Publisher, all statements made herein are believed to be reliable, truthful and accurate to the best knowledge of the Publisher. However, the Publisher disclaims and is not liable for any liability or losses, which may be incurred by anyone relying on information published herein. You are encouraged and advised to independently verify all representations made herein before making investment or collecting decisions. The collectible coin market is speculative and unregulated and recommendations are meant for those who are financially suited for the risks and holding times involved. Past performance is not a guarantee of future results. The Publisher, its principals and representatives do not guarantee a profit, nor do they guarantee that losses may not be incurred as a result of following any recommendations in this report. Readers should not look at this report as giving legal or investment advice. Reproduction of quotation of this report is prohibited without written permission of the Publisher.