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Friday, 30 December 2011

The gold price: my opinion

The gold price is now falling significantly.  I believe the long term trend remains upwards.  The current retracement might provide an opportunity to accumulate more gold and gold stocks, but only after a low is confirmed.  The price of gold tends to
move in the opposite direction to the US dollar, measured by the "US Dollar Index".  When the dollar goes up the gold price generally goes down, and vice-versa.  The US dollar Index measures a weighted average exchange rate of the US dollar against predominantly the Euro.

Both the US dollar and the Euro are being devalued against gold.  The US dollar is currently rising against the Euro because funds are being transferred away from Euro denominated investments.  But the US dollar's safe haven status is being eroded because, like Europe, the US economy is also saddled with serious debt and other problems.  While the US dollar is currently less risky than the Euro, fundamentally it is not much more attractive than the Euro.  Nations continue to reduce their exposure to the US dollar.  (See "China, Japan agree to reduce reliance on U.S. dollar" for the latest development.)

After global sentiment towards the Euro is resolved one way or the other (positively or negatively), market focus will return to the US dollar, for it remains the global reserve currency.  When the US dollar resumes its long term downward trend, the upward trend in the gold price will resume.  If you are interested in the reasons I hold this opinion, see this recorded presentation.  The chart below shows the long term history of the gold price.

Courtesy of OptionVue Systems Inc.

To learn how to identify significant stock price low turning points for buying, contact my colleague Paul Wise at Options21.  For a live overview of, and outlook for, global markets, join our monthly Free Live Stock Market Briefings, presented over the internet. 

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