After a four-day losing streak, gold prices finally broke to the upside as the US dollar weakened. Early Friday morning, gold futures for December delivery gained $37 to reach $1,650. Meanwhile, silver futures climbed more than $1 to hit $31.50. Not only has Europe been keeping equities on edge, but also precious metals. Massive sovereign debts, along with a constant flow of conflicting headlines, have given the US dollar some newfound strength. This recent strength has been one of the factors weighing on gold and silver prices.
The US dollar index, also known as the DXY, is composed of a basket of currencies. It was created by JP Morgan in 1973, and has only been updated once. The heaviest weighting is given to the euro at a whopping 57.6%. The next closest currency based on weight is the Japanese yen at 13.6%. As rumors leak out of Europe relating to a so-called solution, the euro changes course accordingly, and the dollar swings in the opposite direction. Not only has this caused the Dow to experience triple digit moves on a regular basis, but has also caused precious metals to fall off previous highs and remain range-bound. While the US has many of the same problems that plague Europe, investors currently view the dollar as the safest option to run to.
Many believe the recent strength in the US dollar is temporary because we have our own debt crisis at home to deal with. With the US total debt at all-time highs, and the spread between US GDP and total debt at all-time lows, Zero Hedge estimates that US debt will officially surpass GDP this Halloween. Considering this, the long-term picture in the US dollar is questionable at best. Earlier this week, I discussed how bond manager Bill Gross made a large bet on QE3 by building up his mortgage backed securities position. Now, Federal Reserve governor Dan Tarullo is rattling the dollar by saying, “I believe we should move back up toward the top of the list of options, the large-scale purchase of additional mortgage-backed securities.” Another large round of buying assets by expanding the Fed’s balance sheet would most likely be called QE3 by investors, and would be positive for gold and silver. The previous two QE programs sent the dollar lower and precious metals to new highs. Now, one day after Tarullo’s speech, the DXY is already feeling the effects of more QE chatter by reaching a record low against the Japanese yen. The Fed has its next meeting at the beginning of November, any more significant signs of additional easing would add more doubt to the dollar.
Currently, gold and silver are stuck in a range while the world waits on Europe and central banks to take action. Gold is trading between $1,600 and $1,700, while silver is idling between $30 and $32. Paul Brodsky from QB Asset Management Company warns that gold could surge to $10,000 or more if a return to the gold standard becomes a real possibility. Although many gold investors would be happy to just see gold break back through $1,700, the long-term picture for the US dollar provides some validity to the $10,000 price point.