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Upward pressure on Gold prices


arbitragr
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So Gold prices are rising, and as per our previous discussion on the other board ... speculators are flocking to Gold for insurance.

My research indicates that the gold price rally has been driven by fear of sovereign default risk.

 

Historically, under normal conditions with no sovereign default risk, there has been a very strong relationship between:

- the price of gold in USD vs. the USD exchange rate compared with a basket of other currencies. Essentially, gold and a weighted-basket of other currencies act as an alternative store of value to the US dollar.

However that relationship has begun to breakdown with gold pricing well above the non-US dollar currency basket:

 

http://i163.photobucket.com/albums/t314/ripleyx/Finance/goldvscurrency.jpg

 

 

So this probably means that speculators are getting fearful of sovereign default and inflation of non-US government currency and paper more so than they are afraid of US-dollar denominated paper/currency.

 

To get a general sense of the fear in the marketplace you can check this out:

 

http://i163.photobucket.com/albums/t314/ripleyx/Finance/goldvsetfsvsdefaultcds-1.jpg

 

CDS spreads on sovereign debt is rising in lock step with Gold ETF demand. This shows the fear in the market place in all its glory since it backs out anything to do with gold prices and central bank activity that may manipulate the relationships we want to see due to currency stabilization activities.

 

 

I personally don't see the gold price crashing down anytime soon, unless problems in the financial sector are solved first. And that may take a while.

 

If foreign central banks decrease their rates to 0% where do investors go? They go to the US. But hey ... wait a minute ... yields on US treasuries are 0% too ... so now where do we go?? Goldrush ...

 

 

 

 

 

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