The gold market reacted positively today on the International Monetary Fund’s denial of a funding package for Italy. Posted by James Randolph on November 28, 2011
Gold Market Set to React to IMF Package Denial
November 28, 2011 – The gold market reacted positively today on the International Monetary Fund’s denial of a funding package for Italy. As expected, today’s news out of Europe was not good for sentiment in the markets. For a little over a week, the crisis has continued brewing there, but on the back burner. The distraction of the holiday, other market activity in the world, and massive bank failures in the United States has been steadily redirecting our attention for a while. But now Europe is back in the headlines, and I expect it will only get worse from here.
Good news for the gold market which is finally reacting in a free market fashion to the European crisis. Gold started the week $20 up per ounce in some markets. We have been writing for the past week that the price of gold should have been significantly higher, given the depth and breadth of the problems Europe is facing and the effect it will have on American banks.
Today, the temporary boost in the US dollar as it is traded against the euro has ended. Currency traders often float pretty easily between the US dollar and its European counterpart, the euro. In this case, they were seeking to capitalize on the European debt crisis. As the crisis continued last week, so many currency speculators long the dollar and short the euro that the strength in the dollar made it appear that the price of gold was lower. A good time to buy, and we told you so.
Now, that particular condition is drawing to a close and we watch for European markets, and subsequently American markets, to react negatively. The gold market should profit from it quite well and steadily, barring any further factors. Further news indicates positive conditions for gold this week as the Bank of International Settlements has released that the creation of OTC derivatives in the first six months of the year set a record, valuing at $107 trillion. That’s right, trillion with a “t.” The total amount in existence is now valued at $707.5 trillion. This is far, far in excess of the $63 trillion global GDP.
While derivatives are dangerous debt instruments that are widely regarded as fundamental in the instigation of the crisis we now endure economically, the frenzied creation of them in the first six months of this year bodes well for gold. There is a correlative relationship between the amount of money in existence and gold. By extension, there is clearly a relationship of the amount of derivatives in existence and gold, even though a derivative has no independent value whatsoever.
Derivatives are literally flooding the system of exchange, effectively debasing the currency. While this is a truly worrisome fiscal policy, it is historically good for gold, which ultimately benefits as the exact opposite of a derivative. Gold is a tangible commodity with an inherent value and has served as the store of wealth for many civilizations. Look for gold to begin a major wave up and ride it.
Senior Staff Writer – Certified Gold Exchange