Gold Trading Like A Currency? Is it time to buy or fold
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Gold Trading Like A Currency? Is it time to buy or fold

Gold Trading Like A Currency?

Remember when $25, 000 was a success? Now it is a garbage collector.

Frank Dane

Gold Trading Like A Currency? Is it time to buy or fold

At one point on Monday, the Dollar was trading in the red and Gold which should have shot up was actually trading roughly 10 dollars lower. As the Day progressed both the Dollar and the Euro were trending upwards together while Gold continued to slide. The story below attempts to provide a reason for this phenomenon.

March 8 (Bloomberg) — Gold prices in New York fell the most in a month on speculation that Greece’s fiscal crisis will be resolved, reducing demand for the metal as a haven. French President Nicolas Sarkozy said that euro-region nations are ready to help Greece. The cost to protect against corporate-bond defaults fell to the lowest rate in seven weeks on mounting optimism that Greece will rein in its budget gaps.
“If the Greek situation calms down, people may not be as interested in owning hard assets,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “Gold is losing its momentum.” Gold futures for April delivery dropped $11.20, or 1 per cent, to $1,124 an ounce on the New York Mercantile Exchange’s Comex unit, the biggest decline for a most-active contract since Feb. 4. The price climbed 1.5 per cent last week.

Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, was down 1.5 per cent in 2010 to 1,116.12 metric ton by March 5. Assets rose 45 per cent in 2009.

“Gold is just listless,” said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. “It’s running into some resistance.” Investors also sold the metal after prices failed to top $1,140, analysts said. Gold’s intraday maximums have been lower for three sessions since touching a six-week high on March 3. ‘Jump Ship’ Full Story

One almost wants to laugh at the reasoning behind this story. In the past, the main reason for Gold’s upward or downward move was always related to the dollar, but not because a small country like Greece was in trouble. We propose an alternative theory. The fact that the Euro and the dollar were at one point trading higher in tandem suggests that Gold is now being treated as a currency. Traders normally jump from one currency to another as they try to determine which ones are overvalued and which ones are undervalued. This is normal in currencies; we see this almost on a daily basis in the Yen, US dollar, Australian dollar, etc.

If this trend continues, then in the short to intermediate time frames Gold could suddenly mount a rather strong correction because traders might decide that there are other currencies that could provide a better rate of return in the short-term time frames. However, this possible short-term negative pales in comparison to the long-term benefit; if this is a new trend then Gold has just passed a significant milestone in that it is now being treated as a currency. Up to now, Gold has been viewed as a hedge against the evil effects of inflation and only those schooled in Austrian Economics or those who follow the hard money movement have up to this point viewed Gold as the ultimate currency out there. This new development suggests that the idea is now possibly becoming more mainstream.

On Friday (March 12), we noticed the trend again. The dollar traded lower, the Euro higher and for the most part, Gold was either trending lower or treading water. Normally, it would have shot upwards the moment the dollar started to pull back. The longer-term implications of this development if it is indeed a new trend are profound. The next time the world experiences a currency crisis, and it’s just a matter of time before it experiences one (potentially with devastating consequences this time around) there will be a flood into Gold because it will now be competing with all the other currencies out there. Thus the demand for Gold could increase exponentially for it now will serve not only as a hedge against inflation, but it will also compete with all the other currencies. It could, in fact finally retake its position as the ultimate currency of all time.


Gold has run into strong resistance every single time it has tried to trade past the 1140 mark. Secondly, it behaved very strangely on Monday and today (Friday, 12th March 2010) by dropping in the face of a lower dollar and this at least in the short term suggests that Gold is more likely to correct than trade to new highs. The weekly sell signal has been neutralized but not invalidated, and once it is activated again it should lead to a rather sharp pullback.
The most important development to pay attention to is that Gold might finally be trading as currency; if this turns out to be true then it has to be viewed as extremely powerful and bullish long-term development. Gold Trading Like A Currency? The answer would have to be a resounding yes. If Gold should pull back strongly, view it as blessings from heaven and add to your positions for it might be the last chance you get to purchase bullion below $1000.

People who live in glass houses should take out insurance.

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Mass Psychology Part I, Sept 26, 2007

Mass Psychology II, Oct 2, 2007

Mass Psychology III Oct, 9, 2007

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Introduction to Mass Psychology

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