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Are rising Gold Prices just a fall in the Dollar...?

AS WE WRITE, late Friday afternoon here in South Africa on 5 Nov. 2010, the Gold Price is making an assault on the $1400 level having been $1332 on Wednesday, the day of the Fed announcement, writes Julian Phillips of the

In the days ahead of that announcement the Dollar had been wavering between $1.38 and $1.40 against the Euro. After the announcement the US Dollar fell quickly down to $1.42 per Euro. Against the Pound Sterling, the Yen, the Swiss Franc and most other currencies, the Dollar has weakened too. But then the Dollar recovered and is sitting at $1.41. Recently gold has again moved in the opposite direction to the Dollar, until it ran up in the Euro vigorously, but has this now changed again? Can there be more to the rise in gold than just the fall in the Dollar?

We believe so, because far more than QE2 happened this week.

In the run-up to and after the announcements of the results of the US mid-term elections the Gold Price barely moved. On the surface we can therefore conclude that the mid-term US elections did not affect the Gold Price. But whether the Republicans or the Democrats won is not an issue for the gold market. What is an issue for precious metals is whether the US government direct the monetary area sufficiently to invigorate the US economy and – should they wish to do so – strengthen the US Dollar?

On the contrary. We found the mid-term result pointed to an emasculation of the government's power on the monetary front. Far too much of a burden has fallen on the shoulders of the Federal Reserve, an institution with only limited powers to resuscitate the US economy. Government should shoulder that role, supported in this by the Fed. Government does not appear to now have the capacity to resolve the economic problems of the US This tells us that the enormous steps needed to be taken to strengthen the US Dollar are not going to be taken, so a fall in the US Dollar is widely expected.

The difference for the Dollar now is that its fall can be precipitous and not simply a repeat of the fall in the last two years. Control over the Dollar's value for the next two years appears to have slipped from the grasp of the US monetary authorities. This is extremely positive for the Gold Price.

Ahead of the Fed's QE2 announcement, a 'bear raid' on gold was mounted that had the Gold Price drop from $1358 down to $1332 in a steep dive that shook the weak holders and triggered more than a few 'stop loss' positions. Ordinarily, this would have been enough to deter investors, but it happened when the market was seeing thin volumes of trade, hence the size of the fall. On the announcement, these bears received a very sharp, silver-coated golden horn in the sensitive parts. The Gold Price rose like a space shuttle, breaking up through the fifties and sixties and on through resistance at $1370. Right now we are tapping $1400 per ounce.

Undoubtedly the activity of buyers looking for physical Gold Bullion from most gold markets in the world was the primary driver. But add to this the scramble of short covering in New York's derivative Comex Gold Futures market that is also going on. The short covering comes not only from those who went short ahead of the announcement, but from longer-term shorts, realizing that the break-out to new levels is well founded on fundamental factors. The announcement from the Fed re-established those fundamentals. However, a greater and greater proportion of Gold Investment buying globally is due to a growing fear of the global currency system itself.

What are the ramifications of the Fed's announcement? The entire financial world had been waiting for weeks for the Fed to make this announcement. It was important because it directly affects the value of the Dollar inside and outside the US While the US does not intend to cause a devaluation that will enhance the international competitiveness of the US, that is what is happening. That is how the rest of the world will see it. They will take action in their own interests to protect themselves.

Foreign competitors have to act, or see themselves suffer as the US has been doing for some time now. This will have three primary effects on the global economy:

  • First, the United States will lose the cooperation they had hoped for from China and other nations whom they asked to let their currencies rise but who will now suffer from a lower Dollar. Global monetary cooperation, sorely needed now, will decay. Currency crises in different nations will be inevitable as they each strive to protect their own interests;
  • Foreign investment capital now channeled into the US (and badly needed) will accelerate its diversification from the Dollar. This will accelerate the fall of the Dollar and see capital exit the US. To the extent this happens it will act as a counter to QE2;
  • It will undermine the Dollar's global hegemony, which in itself will create considerably more uncertainty as to exchange rates and values.

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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