Commodities | Dec 07 2006
By Greg Peel
The gold price has fallen 2.25% in the last two days and the silver price has fallen 3.5%. For precious metal fans recently deciding it must to time to get back in, it’s been a bit of a setback. And wasn’t the US dollar meant to be going to hell in a handcart?
The bulls are not fazed. Precious metal prices are currently locked into their traditional inverse relationship with the dollar, having seemingly tossed away the correlation to oil and base metals that defined the big correction from May. A combination of weak US data, particularly in the manufacturing and housing sectors, and conversely strong European data, conspired to send the euro through its long held 1.29 barrier to the US dollar last week. Significant breakouts often cause a scramble, and this one was no exception.
Adding fuel to the dollar “collapse” theory has been constant talk from central bankers around the world that it was time to diversify away from US dollar assets. Talk is cheap, and the dollar got cheaper, but so far there’s been no action. US Treasuries have not moved an inch.
So it was that that which many traders were expecting to happen happened – the dollar corrected somewhat from its oversold position on the back of some more encouraging US economic data. And such it was that precious metals reacted accordingly.
Gold sailed up through what everyone thought would be stiff resistance at US$640/oz as soon as the US dollar broke down. The buyers were back. Silver passed by previous highs of US$13.96/oz without much of a blink. While the dollar was being temporarily oversold, the metals were being temporarily overbought.
No great surprise then that as the metals slipped back to those previous resistance levels, traders could see a precipice beneath. The selling started and the buyers ran away. Gold is now back at US$630/oz, and silver at US$13.56.
Gold bulls actually like pullbacks of this nature, as it shakes out the nervous buyers and re-establishes a more solid foundation. Talk is that US$620/oz would still be a healthy consolidation, and even US$600/oz would not upset the upward trend.
Tonight the ECB will make its decision on rates. It has been the ECB’s goal to shift rates to a “neutral” level, such that monetary policy is neither easy nor tight. As to what this level might be is still a matter of conjecture, so precious metals traders are anxiously awaiting both the decision and the accompanying rhetoric. If rates go up, the US dollar could resume its fall. If they remain stable then all thoughts will turn to whether the Fed might ease next year. If the ECB cuts, then there may be a panic rally in the US dollar that would mean more carnage for precious metals, and a possible reassessment of global economic disparities. But the latter is very unlikely.