Gold Price Climbing Because It's the Only Safe Haven Asset

Pinnacle Digest writes: In Clif Droke’s latest article he discusses gold’s recent rally (up $100 an ounce in last 30 days). Because of the dollar’s recent decline occurring at the same time gold has rallied, many investors believe the market is privy to further easing being announced by the Fed (in the near future). Droke warns readers not to fall into the trap of believing further easing is imminent and encourages investors to consider a different reason for gold’s rally. Droke believes that the dollar’s collapse and gold’s rally can be attributed to the two assets serving their role as crisis barometers. He believes that gold’s rally is a warning of economic trouble ahead.


While Droke gives some credit to gold’s sharp rebound because of the oversold territory it entered in July ( gold had a negative reading in July of 227, which marked a ten year low), its sustained rally comes from the fact that tremendous uncertainty remains in our economic system (both in Europe and the US). And when such a scenario develops, the US dollar collapses (it is now flirting with its 200 day moving average).


It has been easy for gold to build price momentum in this market environment. The market speculation of further QE from the Fed and intervention from the ECB (although it may be a wrong assumption) has helped gold indeed. This has triggered a dollar collapse which is also helping gold. When gold entered its extremely oversold state in July a rebound was all but guaranteed. However, the uncertainty in the market and economy are the true driver behind gold’s SUSTAINED rally.


Droke stated “Between rumors of QE3 and a bond-buying plan on the part of the European Central Bank (ECB) to help save the euro zone, both the dollar and the euro currency have responded as if the rumors were gospel truth.  The dollar has plunged from its 2-year high in July and is struggling to remain above the widely watched 200-day moving average.  Since gold tends to trade inversely to the dollar, the dollar’s weakness has benefited gold.”


He goes on to state “Rather than anticipating QE3, is it not possible that gold’s rally is instead the result of “smart money” investors foreseeing economic trouble on the horizon after the election is over and the 4-year cycle has peaked?”


The market only wants to believe that gold’s rally and the dollar’s collapse is due to the belief that QE3 and Eurobond intervention from the ECB is a foregone conclusion. This is a risky assumption to make. Looking back on the ECB’s handling of this Eurozone crisis (now two years old) clearly shows the central bank is slow to act, as are European politicians. While the same can’t necessarily be said for Bernanke, he has shown caution over the past year and has disappointed investors expecting more quantitative easing.  


Gold’s typical standing is for it to be a ‘safe haven asset’. And according to Droke, it is once again taking on the role.  He states “Such a preemptive rally on gold’s part is not without precedent.  A similar rally occurred in 2001 as gold responded to the bear market and economic recession brewing at that time by commencing a new bull market.”


Click here to read our latest interview with Clif Droke on the gold market and America’s economy.