Gold up last week but don't expect the uptrend to continue this week unless we see bigger news out of Europe. The bad news in Europe is balanced by a strengthening dollar which keeps downward pressure on commodities prices. Next week will be decided by which of those factors weigh the heaviest on the markets.
My readers already understand that when I use the word “strength” in relation to the economy that I’m speaking in relative terms. The U.S. economy looks good mostly because the economies of the other industrialized nations look worse, with the possible exception of Canada. Our neighbors to the north largely avoided the meltdown of the real estate market and collapse of their banking sector by not letting their banks and Wall Street treat the Canadian economy like their personal piggy bank.
The buzz this week centered around the downgrades handed out to nine European economies including France and Austria. I would maintain those downgrades are largely symbolic and nearly meaningless in practical terms, but anything that adds to the fear quotient always holds the potential to spur gold prices. As mentioned above, the headwind to precious metals price increases will be the strength of the dollar.
My best guess is that the Euro-zone downgrades have already been priced into the market and, unless there is more bad news out of Greece, the strengthening dollar will win out over the general anxiety of the markets. That means another week of prices flat to slightly down, with the caveat that it all goes out the window if Greece announces they intend to default on all or part of their privately held government debt.
Any time the dollar shows strength, it’s a long-term bearish indicator for gold. The U.S. dollar is still the world’s reserve currency and, when it is doing well, that diminishes the need for gold, which fills a niche as the world’s secondary reserve currency.
Taking the longer view, I just don’t see that much improvement in the U.S. economy. Until the investment world demands changes to CEO compensation, we’re going to continue to see executives get paid for inducing volatility in the share prices of the companies they manage. The executive offices use volatility to extract value from companies and line their own pockets at your expense. Hedge fund managers and investment houses also reap bonuses as programmed trading limits their losses and amplify violent swings in equity prices.
That will leave gold as one of the few low cost hedges against the continued pilfering of your equity investments.