It’s been a busy week for the gold price. Sceptics have been quick to come out and attack it. It finished the week at $1599 / £1028 per troy ounce.

Gold has declined by 8.8 percent over the last week. In doing so it took out it’s 200-day moving-average (a technical indicator many traders use) for the first time in nearly three years.

Will the gold price continue to head south? Only the markets know that answer. The market is very difficult, complex and, at times, unfathomable. All we can do is look at the pieces and try to put them together.

Below is a chart that shows the gold price overlayed against the dollar index (an index of the value of the United States dollar relative to a basket of foreign currencies).

source ft.com

You can see the recent, sharp sell off in gold (the red line) at the far right of the chart. It also shows the strengthening dollar. Can this last?

The Dollar’s strength

The reasons for the strengthening dollar is not just because investors are seeking it out as a safe haven. There are other factors at play… At the end of each year banks seek to reduce their balance sheets and some hedge funds need to raise cash to return to investors. Both of these have an affect on the demand for dollars. When you add these to the worries investors have with alternative currencies – and particularly euros – we can begin to understand the rise in demand for dollars.

However, one must remember the very reason why the gold price is in a bull run. The macro environment is still very turbulent.

The eurozone crisis is acting as a distraction for the fundamental problems that still face the dollar. And the more involved central banks and the Federal Reserve are in their attempts at engineering their economies, the higher the eventual fallout will be.

In a recent publication “A Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis,” Nicola Matthews and James Felkerson undertook the most comprehensive study of the raw data on the Fed’s bailout of the financial system to date.

In it they lay out the shocking magnitude of the Feds response, as lender of last resort, to the recent financial crisis of 2007-09.

The findings show a Federal Reserve bailout commitment in excess of 29 trillion dollars.

The sums are simply staggering.

It seems only a matter of time before another euro and US round of quantitative easing. These inflationary measures will only push up the value of commodities. And last week’s bickering between English and French politicians has reignited old feuds that have been bubbling under the surface.  We are in troubling times, but gold continues to shine. It’s reputation as a hedge against inflation, the need for countries, and funds to diversify away from their large dollar holdings and the current fiasco in europe all point to higher gold prices.

See you next week,

Digger.

Important

Information in Gold Price Today is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision.