For the last couple of decades, the primary driver of the price of precious metals has been the value of the U.S. dollar. On days when the dollar moves up against other major currencies, the price of precious metals moves down. On days when the dollar moves down against other major currencies, the price of precious metals moves up. This inverse relationship exists because all precious metals are denominated in U.S. dollars, and because there hasn’t been a lot going on the last two decades that would cause people to put their money into precious metals instead of the U.S. dollar. Owning the dollar has been more desirable than owning gold or silver by most because U.S. bonds pay interest. Not only does owning physical gold and silver not pay, it costs to store and insure.
That may have all changed on November 30, 2010. The markets opened lower on European debt fears. Ireland got its bailout. But now Portugal and Spain are a concern. Out of habit, money flowed into the dollar, pushing it up about one percent against the euro. But an unusual thing happened simultaneously; the price of gold and silver, in U.S. dollars, moved up too. Instead of moving opposite the dollar as usual, gold and silver moved the same direction. At one point midday, the price of gold was up 1.3% despite the dollar being up about 1%. At that same time, the price of silver was up 3.9%, three times the percentage increase of gold.
Why did the price of silver and gold move up despite the rising dollar? A number of European investors put their money into precious metals instead of the dollar. That’s why. They are losing faith in the dollar. They, as I, would rather pay to own silver that be paid to own dollars. Because the gold market is tiny compared to the global bond markets, it doesn’t take a very large percentage of the available capital moving from bonds to gold to affect the price of gold. And the silver market is a tiny fraction the size of the gold market.
Add to this the fact that despite our huge economy and tremendous disposable income, Americans only account for about 20% of the precious metals purchases the last few years. We Americans tend to analyze investments within the context of the American economy and values. But in precious metals, America does not dominate.
Gold, in U.S. dollars, was $35 below its all-time high today. Silver was a similar percentage below its recent 2010 high in U.S. dollars. But in Euros, gold made a new all time high.
It seems that Quantitative Easing, compliments of the Fed, has delayed the day of reckoning for the U.S. and its debt crisis. Which means it will be a while longer before many Americans begin to wake up to the fact that their dollars are on the way to devaluation. As the debt crisis unfolds in Europe, depend on Europeans to drive the price of silver higher, even in the face of a strengthening U.S. dollar. Then, when the dollar begins to weaken, the weakening dollar will continue to drive the price of silver.