There’s More To The Gold Rally Than European Market Fears

Gold was down 1.72 percent at the end of 2014, but things are looking up for the yellow metal. This week I returned from presenting at the Vancouver Resource Investment Conference, where sentiment for gold was through the roof.

And with good reason. Even though gold was down last year, it still ranked as the second-best-performing currency, following the U.S. dollar. The metal has risen about 10 percent year-to-date, and on Tuesday, for the first time since mid-August, it broke through the $1,300 mark.

Are you excited yet?

Our two gold funds, the Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), have responded positively to the rally. Both have jumped above their 50-day moving averages, a key trend indicator many investors use to decide when to allocate assets.

 

Gold Rally

 

 

Gold Rally

 

You’ve probably heard or read that gold’s breakout is a direct result of what’s currently happening in Europe, but there’s much more to the story.

To be clear, the events I’m referring to are a huge deal and shouldn’t be discounted. As we say at U.S. Global Investors, government policy is a precursor to change, and certainly gold has struck a musical chord in the world of currency symphonies.

The European Central Bank’s (ECB’s) unveiling of a much-needed, trillion-dollar quantitative easing (QE) program will hopefully lead to a stronger economy in the eurozone. For two years now, it seems the region has held much of the world hostage with its lack of growth.

Switzerland unexpectedly unpegged its currency, the Swiss franc, from the euro, shocking money managers all over the world. The country also let its 10-year government bond yield sink into negative territory, joining Germany, Spain and Italy, whose yields now hover near record lows. This makes other assets, especially gold, look much more attractive.

And in Greece, the possibility of a far-left, anti-austerity Syriza victory in Sunday’s general election could spell the end of the Mediterranean country’s membership in the European Union.

All of these developments have spurred investors to seek safety in gold.

But there’s more at work fueling the metal’s ascent.

Currency Wars

As I’ve discussed many times before, the strong U.S. dollar—it’s currently up 2.2 standard deviations for the 10-year period—has not only weighed on crude oil but also caused other global currencies to depreciate. Both have helped many foreign gold producers expand their profit margins, as bullion is then able to gain in value more quickly.

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Kurt Benson 6 years ago Member's comment

I still think we have major case of deflation on our hands and that will not be positive for gold in the med to long term.