Real e Finance means business
Gold and Silver
Plummet as
Dollar Rallies
on EU Woes
Dec 14, 2011
Plummet as
Dollar Rallies
on EU Woes
Dec 14, 2011
The euro fell to a yearly low on December 14th as Italian interest rates at
auction hit new highs. Collateral damage to the EU crisis is showing up not
only in stock prices, but in the precious metals markets as well.
The euro fell below the psychologically important 1.30 level in European
trade and is testing support from last January. If it breaks that support (and
it is pretty certain that it will), the 125 level is the next stop and 1.20 after
that. The euro can be tracked through the ETF FXE. At the same time the
euro is breaking down, the trade-weighted dollar has broken out. The
dollar has been stuck at key resistance at 80 since September. It tested
this level both in September and in November. It traded as high as 80.67 in
early morning trade. There is still strong resistance just under 82. A break
above that will cause the dollar will head toward 88. The dollar can be
tracked through the ETF DXY.
As the dollar rises, gold and other commodities fall. Spot gold was as low
as $1562 an ounce in early New York trade. Gold plummeted after the
New York open and was down as much as $68 an ounce.
Gold can be tracked through the ETF GLD. Gold decisively broke its
200-day moving average (which is very bearish) and this was the first time
it has traded below this level since early 2009. The next level of support is
the 65-week moving average, which is currently in the high 1400s.
While gold in general should go up during a crisis, this did not happen in
the fall of 2008 -- gold was down around 30% at the time. During credit
crises -- and the situation in Europe is a second global credit crisis -- it is
reasonable for gold to decline. Central banks lease gold cheaply to banks
and large hedge funds and they sell it on the market to raise quick cash (I
have explained how this is done is some detail in my book "Inflation
Investing"). This time around, there is the added danger that the IMF will
sell some of its large hoard of gold to raise money for a eurozone bailout.
Gold's companion metal silver is much more volatile than the yellow
metal and is influenced by the economy as well as financial market
events. Silver traded as low as $28.47down $2.37 after New York trading
opened. This was more than a 7% drop. Silver can be tracked through the
ETF SLV. It has strong support around $26. If it breaks that, expect it to head
toward the $21 level.
The EU debt crisis is not over and is likely to continue for a while longer and
possibly for many more months. EU leaders have come up with one
"solution" to the crisis after that has failed shortly after it was announced.
Look to the markets to see whether or not their future gambits will create
some viable end to their problems. So far the markets have made it very
clear that the situation in Europe is continuing to deteriorate and it is
dangerous to be on the long side of almost any investment except the U.S.
dollar.
Disclosure: None
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
Daryl Montgomery
© 2011 realefinancemedia.corp - all rights reserved
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have coined this term
to describe the current
monetary and fiscal
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government, which
involve
unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
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