‘Very large’ gold short covering on the cards

On Tuesday New York closed at $1,108.70 up $5.40. The dollar was weaker at $1.1144 down from $1.0978 with the dollar Index also weaker at 96.58 down from 97.46. This morning the LBMA gold price was set at $1,116.80 up $3.55. The euro equivalent was €1,003.23 down €6.29. Ahead of New York’s opening, gold was trading in London $1,117.10 and in the euro at €1,003.28.

The silver price closed at $15.34 up 10 cents in New York. Ahead of New York’s opening it was trading at $15.35.

Price Drivers

Looking at today’s moves in both gold and the dollar, the Yuan devaluation did not cause these moves. The dollar Index has weakened against most currencies and the euro has jumped stronger. This is reflected in a falling euro gold price. Nevertheless, if the gold price keeps rising in the dollar expect to see a very large process of ‘short covering’ start.  

The People’s Bank of China has changed the Yuan’s pricing from a fixing within a ‘dollar peg’ to a floating rate regime [based on the previous day’s close]. The IMF welcomed this as part of the necessary process to become a ‘well-used-currency’ continuing the process of making it eligible for inclusion in the SDR. This is a tiny devaluation in percentage terms so far at 3.5%. The Yen has fallen nearly 2% this week alone and nearly 65% from its peak of 76 to the dollar. Likewise the Euro’s fall from its peak of $1.40 to $1.10 is above a 25% fall. Hence the somewhat hysterical cries of foul are unjustified. We expect further devaluations to come.

Investors should be clear that the world’s monetary system is now undergoing deep structural changes that will turn it into a multi-currency system. While the E.U. and Japan can be considered ‘allies’ of the U.S. China’s interests are very different from the U.S. and the changes will bring about a very much more volatile currency world, where exchange rates are directly linked to the benefits each nation can gain by moving them. Even the U.S. ‘manages’ its currency to this end.

There were no sales from the SPDR gold ETF or from the Gold Trust on Tuesday. The holdings of the SPDR gold ETF are at 667.694 tonnes and 161.38 tonnes in the Gold Trust.  The ‘bear raid appears to be over!

Silver should accelerate its rise against gold.

Julian D.W. Phillips for the Gold & Silver Forecasters www.goldforecaster.com and www.silverforecaster.com


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