The red ink is flowing in commodities and European equity markets straight out of the gate this morning. The dollar surged against the euro, knocking the props out from under commodity prices, including gold, crude oil, silver, copper, platinum and palladium.
Gold is down $11.54 to $1,628.14 and silver is off $0.68 to $30.96, bringing the silver/gold ratio to 52.5, exactly where it started last week. In fairness to precious metals let me say it’s hard to find an investment class that’s not bleeding red ink this morning.
Prices for gold crashed through the $1,640 support level and straight into the previous support level in the $1,620 range.
Simultaneous selling in equities and metals usually mean investors are fleeing to cash and this time they’re parking that cash in dollars.
If this keeps up the Fed will be forced into another round of easing, which is now just as much a defensive currency strategy as a driver for the economy. The Swiss were forced into the same defensive easing a few months ago when the Swiss franc became the global currency de jour and that came at a time their economy was booming and sovereign debt was low.
The Federal Reserve will be forced to devalue our currency or watch airplane orders start to shift from Boeing to Airbus and all the other bad things that happen when the dollar gets out of whack with the rest of world’s currencies. If you agree with that scenario, then buying gold at prices we haven’t seen since August of 2011 would be the wise strategy.
While a strong U.S. economy is contributing to the weakness in gold prices, it’s not the primary cause of the crash we’re seeing today. What’s driving gold prices today is a flight to cash by European investors who are selling precious metals to cover losses in the equities markets.
I know it’s hard to buy during times of panic flight because you can lose money when prices keep going down. Nobody likes losing money, but the hard fact is no one makes money chasing the market. If you buy when gold is flying and sell at times like these, when other investors are unloading assets, you’ll consistently lose money.
Times like this are why you always keep a little reserve cash, so you have money to buy when everyone else is selling. And you build up that cash reserve when the rest of the world is in a buying mood.