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It has
become a media tradition for moves in the gold price to be related to some
political event or a civil war or a major tragedy such as the earthquake in
Japan, when the events have a negligible effect on those markets. We find it
unfortunate that this happens because it is misleading. For instance, this
morning we were informed that the gold price had risen in the dollar, because
of Japan's earthquake and tsunami. In fact it was almost entirely accounted
for by the fall in the dollar against the euro. The gold price shows its
market movements most clearly in the euro, not in the U.S. dollar. A glance
across the euro gold price of the last week reinforces that statement,
whereas the gold price in the dollar clearly shows the movements in the euro
plus the moves of the U.S. dollar against the euro.
This piece looks at some of the worst
of the misleading statements that may confuse or misdirect gold and silver
investors, should they add credence to these statements. It also looks at
what pieces of news will move gold and silver prices.
What does not affect the gold and silver prices?
Investors should stop for a moment
when they read a headline attributed to affecting the gold price and ask,
"what investors will go into the gold market, sell his currency and buy
or sell gold or silver, because of a demonstration in the Yemen, or a bomb in
Bali?" How will that event feed through to cause this unrelated market
to react to such news through the buying or selling of that metal? The event
must initially cause a financial ripple causing uncertainty globally or
instability, to the extent that it will affect the global centers of finance.
No matter what sympathies one may or may not have with the cause involve,
unless they feed through to global financial markets, they will not cause an
investor to buy or sell any unrelated financial product.
Today, in Japan, the company that
owns the nuclear reactors is down 23% in price. Companies that make cars and
rely on the power company for power are down 6%+ ,
because they have closed down. This identifies clearly how the ripple of
disaster will cause those companies in losses. Thus the damage is priced in
reasonably. However, does Japan's disaster affect the Dow Jones or the FTSE
or the CAC40? No, of course not, so why should it affect the gold and silver
prices? This is what you the investor must filter out.
How could Japan's disaster affect the
gold and silver prices? To the extent the disaster affects the value of the
Yen in international markets, yes, it may prompt investors to place some Yen
investments into gold, but we believe this will depend on the impact the
additional liquidity the Bank of Japan has pumped into the markets and its
cheapening affect on the Yen, more than the disaster itself. It sounds
callous, but sad to say money has little emotion if any.
What news does affect the gold and silver prices?
- The U.S. dollar exchange rate
moves against the euro produce an almost immediate change in the dollar
gold price. The same will apply to the gold price in local currencies
against the dollar and in turn the euro. This is because the market
records real changes in gold prices in the euro not in the U.S. dollar.
- The same is true of gold prices
in any other currency, although they tend to reflect the change against
the U.S. dollar, which then moves against the euro.
- Many used to believe that the
oil price was a gold price determinant, until the oil price popped its
cork and ran up to $145 in 2007. It was then realized that the oil
price, insofar as it measured instability or uncertainty,
affected the gold price, but not in a direct, fixed ratio. Of course,
had the demonstrations in Egypt led to the closure of the Suez Canal, an
oil crisis across the globe would have been precipitated. Riots in
Yemen, where there is no significant oil will not affect the oil price, nor precious metals. But if the riots in Bahrain
affect oil production there, or lead to them crossing the causeway into
Saudi Arabia and led to a cut in oil production there, then there would
be a global oil crisis and all global financial markets would react
strongly. This is because of the volume of oil that could not be
produced and the ripple through to the global economy. The precious
metal prices would then soar for as long as the crisis remained
unresolved.
- Should high oil prices persist
and not simply be a 'spike', then they will heavily impact inflation
worldwide. This will cause gold and silver to rise as money cheapens.
- The switch from the pricing of
oil from only the dollar to any currency or even a basket of selected
currencies would undermine the U.S. dollar in the monetary world and
lead to a strong upward rise in the gold and silver prices.
- A significant purchase of gold
by a signatory of the Central Bank European Gold Agreement would change
the world's perspective on gold in the monetary system.
- Any news that directly affects
the structure of the global monetary system would have a rapid and deep
impact on precious metal prices.
- Confirmation of the decay in the
global monetary system [such as a failure of Ireland to renegotiate its
'bailout' terms] would indicate that Irish debt would have no market and
threaten the stability of the Eurozone. This
would prompt precious metal buying to escape the damaging impact on the
euro and on the future of the global monetary system.
- China selling U.S. Treasuries on
a persistent ongoing basis would do the same as this would directly
indicate the slow demise of the U.S. dollar as a credible global reserve
currency.
- As to day to day news, much as
it may make an appealing story, most supposed drivers of day to day gold
and silver prices do not drive people to buy gold or silver.
In the Far East the emerging [India,
China, etc] more than the developed nations[Japan ] look at gold and silver
as financial security, some way above government or bank investments or equity
investments. There, the ongoing realization that gold and silver are real
money, drive gold and silver markets more than any sudden event.
However, there are times when an
investor may rely on the emotional appeal of a piece of news rush into the gold
market only to find the market did not react subsequently. The media are
there to 'sell' stories, but investors have to discern the impact if they are
to maximize profits. Here's to successful investing!
Julian D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
Is your wealth effectively structured to avoid the pernicious effects
of the regulatory climate that we have moved into? It should be and we can
help you to do so professionally and within the law. Please contact us for
any help regarding this at: gold-authenticmoney@iafrica.com.
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