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Thursday, 15 December 2011

Euro Crisis leads to strong dollar = weak US economy

The ongoing crisis in the Euro zone has had the expected reaction from investors who are indulging in a perceived 'flight to safety' in the US dollar. I say perceived because the economic effects of a string dollar will lead to decreased exports and increased imports which will damage the already frail US economy.

The only option available to weaken the US dollar is yet more quantative easing or in plain terms to print more money. When the supply of US dollars increases whilst the supply of commodities remains the same the simple economic effect is to raise the price of commodities.

So why is the price of gold and silver falling?

Well firstly the price of gold is always expressed in US dollars so a strong US dollar means a lower price in GB pounds.

Secondly there is the herding effect... US dollars look like a good short term gamble and those professional traders are following the sound bet and riding the wave. All waves inevitably break but most of these investors are nimble enough to get off at just the right time.

Thirdly we are nearing the option expiry date for the COMEX. It is traditional at these times for the market makers such as HSBC and JP Morgan to take down the market.. Gold generally has a cyclical downturn between now and the February options expiry. But the US dollar conundrum adds a further twist to expectations. The US dollar will head back down in due course and when it does the price of gold will rise accordingly. At the moment silver is trading at £18 per troy ounce and gold at £1,040 per troy ounce.

I'm eagerly watching for the right time to buy in... £15 for silver and £1,000 for gold? There should be some massive gains to be made if you can time the bottom of the market which will fall at some point during the next two months.