Prices of gold were pretty volatile during the week of August 20-24. The behavior of gold depends mainly on the behavior of the American dollar but its recent decline was attributed to investors speculating that declines on the equities markets can slow demand for all precious metals.
Benchmark indices have been rebounding the whole week but yesterday they slumped after Countrywide Financial’s CEO Angelo Mozilo said that the current housing and mortgage crisis could lead to a recession in the US. Such statements have its effect on gold prices. Also, the World Gold Council announced that inventories of StreetTracks Gold Trust, the largest exchange-traded fund backed up by gold, reached 514.21 metric tons.
As usual, the situation on the gold market depends in a vast majority on the situation of the American dollar. Prices of the yellow precious metal typically move in the opposite direction than the USD, thus they are negatively correlated. This correlation can be easily tracked on the charts. On Wednesday, when risk aversion declined and capital started flowing out of the US, the EURUSD started increasing. The main currency pair in the world rallied from 1.3452 all the way to 1.3603 on Friday. Simultaneously, gold increased from $654.52 to $664.22 per troy ounce. Since then, gold declined to $658 amid speculations that the slump on equities markets can lead to lower demand for precious metals. It seems this is just a corrective movement in the increasing trend gold has been since mid-August.
From a long-term perspective, gold is in an increasing trend. It rebounded from the $642 per troy ounce reached on August 16th. The tendency of the American dollar to depreciate, due to a possible interest rate decrease in the US, should pull prices of gold up. Gold will become attractive again to investors as an alternative investment.
Adam Narczewski
X-Trade Brokers Dom Maklerski S.A.
adam.narczewski@xtb.pl