Despite another surge in strength for the dollar against the euro, metals and crude oil prices were higher yesterday morning.
Gold was up $5.95 in early trading to $1,547.90 and silver was up $0.13 to $27.44, raising the silver/gold ratio to 56.4.
The run on European banks continues only it’s not just Greek bank customers withdrawing euros, but also customers of Bankia SA in Spain who have pulled out over a billion euros in just under a week.
Between the equity markets, bank runs and a sell off in precious metals, there is a huge amount of cash building up in the financial system and the pockets of everyday people in Greece and Spain.
While I don’t think today’s price support in gold necessarily means that people are using that free cash to buy precious metals, I believe they will at some point. I think it’s likely all this free cash will, at some point soon, translate into a higher demand for physical gold.
I believe the uptick in the gold market is inevitable because, while large financial organizations can move money around to different currencies, like the dollar, the average person on the street can’t do that. Right now there are, literally, billions of euros walking around in people’s pockets.
Institutional investors overseas are betting against the systemic weakness of the euro right now by holding their cash reserves in dollars and Swiss francs. Most people can’t do that and as the euro continues to weaken; the options will be buying gold or watching inflation and dilution eat up the value of those euros.
Another factor to weigh is that a strong dollar is not really a competitive advantage for U.S. businesses. It’s good on one hand because you can buy more with your dollars, but it also means our exports are going to be at a competitive disadvantage in global markets.
The run on dollars already has the Federal Reserve signaling that it will not hesitate to inject more cash in the U.S. economy if things get worse and it’s likely the decision will come shortly after the current bond trading program, called Operation Twist, ends in June. If that happens, gold prices could rebound quickly.
My sense is we’re going to look back on these days as an extraordinary buying opportunity.
Chris Poindexter, Senior Writer, National Gold Group, Inc