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Is it Time to Sell Gold Bullion?

September 29th, 2011 No comments

Volatility with a capital ‘V’ made the week ending September 23 one of the most ‘interesting’ of the year. And in the commodities and equities markets, it hasn’t exactly been a year without drama—for every investor in every sector. In just a week, the price of gold decreased from $1,811.88 to $1,650.05 an ounce. It was also a bad week for other commodities and for the world’s stock markets. On Friday, September 23, silver plunged more than 17% before making a slight recovery. Oil prices dipped below $80 a barrel in the United States. The Dow Jones Industrial Average declined 6.41%.

In the past 18 months, the price of gold has often increased when stocks have taken a pounding. However, this past week, the price of gold declined as investors decided to sell gold bullion. And if there’s a reason for the decline in the price of gold, the current crisis, or impending crisis, in the Euro is a possible reason. The dire financial situation in Greece, and the potential for what’s grimly being called ‘contagion’ means that financial ministers in Europe must make some major and potentially brutal decisions about Europe’s currency. Against this backdrop, the dollar has regained some strength. There was also an indication that some institutional investors were selling gold bullion to take profits—as their equity investments continued to show weakness.

Historically, there’s been a strong inverse relationship between gold and the price of the dollar. So, for those who are thinking it’s a good time to sell gold bullion, the key question is ‘what’s going to happen to the dollar?’

In the next several months, all eyes will be on two key global economic drivers.

  1. The Federal Reserve
  2. The Eurozone

With the economy in the United States continuing to sputter, despite two rounds of ‘quantitative easing’ and a massive stimulus package, the Federal Reserve is considering another round of quantitative easing to generate growth. As we’ve written in previous blogs, quantitative easing is code for printing money. And when the government prints money, it devalues its currency. And when a currency is worth less, inflation rears its ugly head and when inflation rears its ugly head, gold becomes more attractive.

In the United Kingdom, Chancellor George Osborne said that European Leaders only had six weeks to find a solution to the financial crisis with the Euro.

“Patience is running out in the international community,” Osborne said. “More needs to be done to avoid a disorderly outcome.” Ironically, U.S. Treasuries may be attractive as the uncertainty in the Euro continues; U.S. Treasuries set a new low yield of 1.7 p.c. as investors sought a safe haven. As the dollar strengthens, it may be a good time to sell gold bullion.

However, major problems linger in the United States economy and the global economic factors that led to the increase in the price of gold in the last two years remain. Yes—it may be a good time to sell gold bullion to take profits but there’s a strong chance the price of gold will reach the expectations of many analysts and hit $2,000 late this year or in early 2012. While there’s no way to predict the price of gold with total certainty, the next few weeks are likely to be volatile—with a capital ‘V.’

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