The Gold Market Weathers the Storm Posted by James Randolph on April 09, 2012
The biggest news for the gold market is not yet impacting the prices we see daily. We are seeing a very offset market environment that will find equilibrium over the coming week. For gold, the biggest event in the past week actually occurred in Europe as the European Central Bank announced that it would continue to keep interest rates low in its lending policies.
This is far from a surprise to the market, but the official announcement from the European Central Bank’s head Mario Draghi deeply affected the markets as the Euro plunged almost 200 bps in currency markets. Typically, the market effects of central bank policy affect the currency markets first as they naturally find a state of balance in relation to all other currencies. The plunge of the Euro is temporarily strengthening the dollar but by the end of this week we will see that dynamic change quickly.
Generally speaking, a change such as we have seen in currency markets this past week should be beneficial to the gold market as gold is valued more highly by investors who get weary of the volatility in currency. The gains seen in gold trading today are a realization of that fact. Gold is renowned for its safe-haven asset status and proves its worth in such times. This will eventually be the endgame of the current dynamic, but it will take time to work through the markets.
This is a key market component that many investors miss: it takes time. The effects of Quantitative Easing, though the program clearly had important features, will not be felt entirely for many years. This is due to the principal of time in the markets. While currency markets are much more responsive to change than other markets, all markets will eventually register the 200 bps move in the Euro this past week.
Quantitative Easing also has the pernicious effect of watering down the purchasing power of the dollars already in the market. Though the Federal Reserve is attempting to quell this effect through “sterilization” and other means, there is no guaranteed way to counter the effect of Quantitative Easing and the price of gold must rise higher based on the easy availability of watered-down dollars.
This makes gold one of the best investments timely investors can make as we await the coming Quantitative Easing and we see weakness in the Euro strengthen the dollar. The gold market is already registering the gains from the balancing of currencies and will continue to gain in the short term.