Khamis, 17 Mac 2011

What really affects gold and silver prices - and what does not

It has become a media tradition for moves in the gold price to be related to some political event or a civil war or a major tragedy such as the earthquake in Japan, when the events should actually have a negligible effect on those markets. We find it unfortunate that this happens because it is misleading. For instance, we were informed by the media yesterday that the gold price had risen in the dollar, because of Japan's earthquake and tsunami. In fact it was almost entirely accounted for by the fall in the dollar against the euro. The gold price shows its market movements most clearly in the euro, not in the U.S. dollar. A glance across the euro gold price of the last week reinforces that statement, whereas the gold price in the dollar clearly shows the movements in the euro plus the moves of the U.S. dollar against the euro.

This piece looks at some of the worst of the misleading statements that may confuse or misdirect gold and silver investors, should they add credence to these statements. It also looks at what pieces of news will actually move gold and silver prices.


Investors should stop for a moment when they read a headline attributed to what is affecting the gold price and ask, "what investors will go into the gold market, sell his currency and buy or sell gold or silver, because of a demonstration in the Yemen, or a bomb in Bali?" How will that event feed through to cause this unrelated market to react to such news through the buying or selling of that metal? The event must initially cause a financial ripple causing uncertainty globally or instability, to the extent that it will affect the global centers of finance. No matter what sympathies one may or may not have with the causes involved, unless they feed through to global financial markets, they will not cause an investor to buy or sell any unrelated financial product.

In Japan, the company that owns the nuclear reactors is down 23% in price. Companies that make cars and rely on the power company for power are down 6%+ , because they have closed down. This identifies clearly how the ripple of disaster will cause those companies losses. Thus the damage is priced in reasonably. However, does Japan's disaster affect the Dow Jones or the FTSE or the CAC40? No, of course not, so why should it affect gold and silver prices? This is what you the investor must filter out.

How could Japan's disaster affect gold and silver prices? To the extent the disaster affects the value of the Yen in international markets, yes, it may prompt investors to place some Yen investments into gold, but we believe this will depend on the impact the additional liquidity the Bank of Japan has pumped into the markets and its cheapening affect on the Yen, more than the disaster itself. It sounds callous, but sad to say money has little emotion if any.


The U.S. dollar exchange rate moves against the euro produces an almost immediate change in the dollar gold price. The same will apply to the gold price in local currencies against the dollar and in turn the euro. This is because the market records real changes in gold prices in the euro not in the U.S. dollar.

The same is true of the gold price in any other currency, although it also tends to reflect the change against the U.S. dollar, which then moves against the euro.

Many used to believe that the oil price was a gold price determinant, until the oil price popped its cork and ran up to $145 in 2007. It was then realized that the oil price, insofar as it measured instability or uncertainty, affected the gold price, but not in a direct, fixed ratio. Of course, had the demonstrations in Egypt led to the closure of the Suez Canal, an oil crisis across the globe would have been precipitated.

Riots in Yemen, where there is no significant oil will not affect the oil price, nor precious metals. But if the riots in Bahrain affect oil production there, or lead to them crossing the causeway into Saudi Arabia and lead to a cut in oil production there, then there would be a global oil crisis and all global financial markets would react strongly. This is because of the volume of oil that could not be produced and the ripple through to the global economy. The precious metal prices would then soar for as long as the crisis remained unresolved.

Should high oil prices persist and not simply be a ‘spike', then they will heavily impact inflation worldwide. This will cause gold and silver to rise as money cheapens.

The switch from the pricing of oil from only the dollar to any currency or even a basket of selected currencies would undermine the U.S. dollar in the monetary world and lead to a strong upward rise in the gold and silver prices.

A significant purchase of gold by a signatory of the Central Bank European Gold Agreement would change the world's perspective on gold in the monetary system.

Any news that directly affects the structure of the global monetary system would have a rapid and deep impact on precious metal prices.

Confirmation of the decay in the global monetary system [such as a failure of Ireland to renegotiate its ‘bailout' terms] would indicate that Irish debt would have no market and threaten the stability of the Eurozone. This would prompt precious metal buying to escape the damaging impact on the euro and on the future of the global monetary system.

China selling U.S. Treasuries on a persistent ongoing basis would do the same as this would directly indicate the slow demise of the U.S. dollar as a credible global reserve currency.

As to day to day news, much as it may make an appealing story, most supposed drivers of day to day gold and silver prices do not drive people to buy gold or silver.

In the Far East the emerging [India, China, etc] more than the developed nations[Japan ] look at gold and silver as financial security, some way above government or bank investments or equity investments. There, the ongoing realization that gold and silver are real money, drive gold and silver markets more than any sudden event.

However, there are times when an investor may rely on the emotional appeal of a piece of news rush into the gold market only to find the market did not react subsequently. The media are there to ‘sell' stories, but investors have to discern the impact if they are to maximize profits. Here's to successful investing!

Author: Julian Phillips

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