Jul 22, 2011

Posted by in Commodities | 0 Comments

Gold Values Benefited from QE2, But What Are the Prospects Now?

Forex Investing

By Tom Cleveland

Investment advisors and investors alike continue to be puzzled and amazed by the consistency of the appreciation trend for Gold prices over the past year or decade, depending on how far back one wishes to look. For those not familiar, Forex investing and is a universally accepted platform of foreign currency markets.

The return for the past twelve months has been roughly 35%.  In 2000, the value per ounce was $273, and today it has peaked at $1,586.  That astounding growth record equates to something north of 17% per year, compounded for eleven years.  Investors would be hard pressed to find another asset that replicated that wealth accumulation model.

 Forex investing strategies can frequently act as a roller coaster ride that gains momentum from one direction taking an about face in another at any given moment .

Much has been written about the impact of the Fed’s recent quantitative easing program, “QE2”, on the prices of global commodities, typically priced in U.S. Dollars for contract and trading purposes.  As the Fed bloated its balance sheet with another $600 billion in bond purchases, the money supply was expanded accordingly, thereby diluting the value of the Dollar on a global basis and forcing a revaluation of basic commodity prices.  The chart bellows attempts to correlate this “revaluation” for Gold prices versus the greenback over the past year:

No, this is not a picture of a lake with a perfect reflection in the water of the surrounding landscape.  The “Blue” line represents the growth rate for Gold over the previous year, and the “Green” line depicts the devaluation of the USD Index over the same period.  Although the Gold and the Dollar before QE2 were unlikely “dance partners” as the problems in Europe unfolded, the above correlation is more in line with traditional thinking – Gold prices tend to go in the opposite direction of U.S. Dollar trends.

At the point QE2 concluded, this past June 30th, the decline in the Dollar had added nearly 12% to Gold’s revaluation.  However, Gold, like many other commodities, has benefited from increased demand as the global economy began to pick up steam again. Other precious metals, corn, and cotton, as well as a host of other commodities, have appreciated well beyond most expectations for the last year.  Global demand helped Gold’s recent appreciation by 23%, but the question now is will current trends continue after QE2?

Currencies and Forex investing have taken center-stage with all eyes on the Euro/Dollar correlation in regard to the austerity plans in motion.

Right at June 30th, Gold did take a dip, an anticipated consolidation period where speculators took their profits and new investors welcomed a chance to enter the market.  A quick run up of 10% ensued, once again astonishing the market, but Gold is most likely reacting to the continuing saga in Europe and the Middle East, while hedging a bit of the risk concern over the adoption of a revised debt ceiling in the United States, currently deadlocked in Congress.

If rating agencies “gulp” and downgrade U.S. Treasury securities, rising interest rates will send another jolt through the global investment community.  Risk-averse investors will rush to precious metals or find solace in the Japanese Yen or the Swiss Franc. Add more turmoil in Europe and the Middle East, and we have a “perfect storm” of sorts building on the horizon, waiting to rock markets once more.  Traders often welcome volatility, but, as was seen in 2007 and 2008, when massive de-leveraging occurs and everyone becomes sellers instead of buyers at the same time, financial markets nose dive in the blink of an eye.

Various scenarios could play out, so keep a close eye on the markets over the next few months and adopt your strategy accordingly. Forex investing has been a very lucrative trading instrument once one follows the proper due diligence.

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