Wednesday, December 07, 2005


Why Are Gold And US Dollar Rising?

A writer at MSN Money looks at alternative reasons for golds rise. "Another factor working against inflation as the primary reason for the metal's recent rally is timing. More than half this year's gain has occurred in the last month, after a long series of rate increases by the Fed and after a big price drop in crude."

"If not inflation worries, then what? The timing of the price move suggests that seasonal factors might be at play. Jewelry demand is often high this time of year. The demand surge for jewelry would at least help to explain the timing of the breakout. If true, then investors need to be concerned that the rally might run out of gas in the first quarter."

"Arguing against such a reversal is the fact that the breakout to new high ground has occurred while the U.S. dollar has been gaining strength relative to foreign currencies. Much of gold's advance into the low $400s came against a falling dollar, compelling many investors to suggest that the metal had become a hedge against dollar weakness."

"But with gold rallying alongside the dollar this historical link may no longer be valid. Looked at another way, gold may no longer be constrained by the dollar and its movement. This important decoupling has some gold speculators suggesting that the move in the metal is foreshadowing a period of financial distress. Frankly, though, such theories have been routinely put forth by gold bugs over the years as reasons why the metal should be purchased and I see no more merit to them today than in the past."

"A more simple reason for gold's move might just be that after years of central bank selling, there are now reports that worldwide central banks are starting to add to their gold holdings. Increased buying on the part of central banks, coupled with the seasonal boost in demand and limited supply, make a pretty compelling case for higher gold prices."

Don't these guys know that silver is "in" this season???
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