In reality, the reaction in both the currency and bullion markets was more due to the perception than to fundamentals. Traders, in this era of Internet induced group-think, often click the sell icon on their screens before their eyes get past the first paragraph of a news story. The days of somber reflection seem to be long gone."A higher interest rate means a stronger dollar. A stronger dollar is bad for gold. Buy dollars. Sell gold." What else does one need to know?
In answer to Mr. Roulston's question, "Everything." This seemingly logical progression is simply not true when the actual data is looked at. There has been a substantial amount of work produced which suggests the real market psychology runs completely counter to this idea.
Gold does better in an environment of rising interest rates, not lower. Why? High risk ventures have to offer high rates of return to attract investment. Treasury Bonds are no differenct in that respect than corporate bonds. In essence, the direction of interest rates is inversely proportional to the investment community's confidence for the prospect for success. So, as long as interest rates are rising, and the political situation which gave rise to the weak currency conditions have not changed, then people will look for an alternative place to park their value while the investment currency rights itself (if it ever does). With the dollar falling sharply from 1.22 to 0.80, the price of Gold has gone from $255/oz to $430/oz. Nothing politically has changed and the baby steps by the FED indicate that they are actually aware that they haven't been selling bonds at the same rate they used to, and are adjusting their behaviour accordingly.
My strategy, is, simply to hold a reasonable amount of gold and silver at these fundamentally low prices until such time as someone at the FED 'pulls a Volcker' and dramatically raises interest rates (i.e. contracts the money supply) to balance out the books of the U.S. economy. When that happens, I'll liquidate my positions in gold and silver, which will have topped (at whatever that price may be... Jim Sinclair is talking $1650/oz gold) and buy T-Bills at that point.
Basically, when interest rates are rising, the Dollar is in a bear market. Therefore, Gold should be in a bull market. Once interest rates peak, the Dollar bull market will begin. At that point, gold will go back to being in a bear market.
You can always tell the end of a bear market... that is that moment when nobody (except you) wants to buy the thing that you are considering, stocks, bonds, gold, dollars.
So, at this point, with leg one of the Gold bull market complete, the question you should be asking yourself is, "Why don't I own more Gold?"
Ta,
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