Gold Bugs Can Thank This Central Bank for New Price Records
Confirming that this is a market for idiots, by idiots, was the 4 am response in the price of gold (NYSE:GLD), which following the Swiss National Banks’s Swiss Franc (NYSE:FXF) peg announcement did not surge, as it should have considering that the SNB just singularly changed the role of the CHF from a “flight to safety” to a carry currency, making gold the only island of stability in a world of fiat insanity, but instead plunged by over $50. Subsequent attempts to regain the $1900+ level were met with constant program selling for no other reason, than just because someone ‘else’ was selling. Of course, the logic is completely and totally the opposite. But don’t take our word for it: here is Reuters:
“Switzerland’s (NYSE:EWL) decision to peg the erstwhile safe-haven franc to the euro (NYSE:FXE) may finally give gold (NYSE:GLD) bugs the chance to see prices hit the once-unimaginable $2,000 an ounce mark, as the metal holds on track for its strongest annual rally in three decades. By buying euros in unlimited amounts to weaken the franc, the SNB is in effect putting more of its own currency into circulation, which threatens to trigger inflation. It has also impacted the Swiss currency’s status as a haven in its own right. While gold prices initially dipped as the move sparked a rush to liquidity in the form of other currencies such as the dollar, the SNB move is likely to lend firm support to gold in the medium term, analysts said.”
Precisely. And it is not only Reuters: Bank of America’s MacNeill Curry said that Gold (NYSE:GLD) will probably rise to $2,050 this year. The rationale – identical to the above: SNB decision to peg franc to euro should also support gold. “They have taken out one of the big safe-haven assets, which is the Swissie.” As for the amount of time the idiots will need to realize that QE3 coupled with the SNB action means that gold is now valued somewhere well over $2000: at least a few days…Which everyone who looks for even the smallest golden pullback will be happy to take advantage of.
“All in all, Switzerland is now on a quantitative easing policy in the foreign exchange markets,” said Peter Fertig, a consultant for Quantitative Commodity Research. “If the Swiss franc is no longer a preferred safe haven due to intervention by the SNB, it will have (a positive) impact on the demand for gold.
Much of gold’s (NYSE:GLD) rise this year – it is currently up 34 percent since January, on track for its largest yearly gain since 1979 – has been fueled by cheap cash, provided chiefly by Western central banks battling debt piles large enough to derail global growth.
Even without the SNB, the deterioration in the euro zone debt crisis and the U.S. economy’s inability to create a single job last month had already prompted many analysts to upgrade their gold price targets this year.
The $2,000 mark is now coming clearly into view — though its sustainability at that level is unclear.
“$2,000 is just another number. There is no reason why it can’t go through that, can’t go a long way through that,” said Natixis strategist Nic Brown.
“This explosion in liquidity creates demand for gold and creates the perception for gold prices to go higher,” he said. “But ultimately, this is a bubble fueled by liquidity.”
Adjusted for inflation, gold already hit $2,000 an ounce in October 1980. In 1980s money, Tuesday’s record high gold price of $1,920.30 an ounce is only worth $720.
But its rally is impressive nonetheless, with the metal set to end September with its twelfth quarterly gain in a row, its longest such winning streak in at least 30 years. Switzerland’s move is just the latest piece of supportive news for the metal.
“I think gold is headed for $2,000. In theory, this could happen in a matter of days,” said Frank McGhee, head of precious metals trading at Chicago’s Integrated Brokerage Services.
“In reality, if this type of intervention action was taken and was ultimately seen to be ineffective, then the market will get new strength from that.”
Who may do most of the buying? Why the same printing madmen themselves:
The most recent data from the International Monetary Fund shows the world’s central banks have bought some 200 tonnes of gold this year, led by Mexico, Russia and South Korea. Investors in exchange-traded products backed by physical gold have increased their holdings by a net 75 tonnes in 2011.
The Swiss National Bank’s “shock and awe” decision may prompt even more of this kind of investment.
So while the robots, the vacuum tubes and the algos are decidedly confused what to make of the noisy intraday momentum, the ultimate direction of the price of gold is beyond obvious. That’s ok – anyone long gold (NYSE:GLD) since the triple digits has more than enough patience to wait. After all, it won’t be the first, or last, time, the Ph.D.-programmed robots need a little time to regain their bearings in a market that has just seen a 180 degree overnight change in virtually everything.
Tyler Durden is the founder of Zero Hedge.