Just One Reason Gold Spiked and Retraced

Around 2 pm EST today, the world took profits. Gold went down. Silver went down. Financials went down. The Dow, NASDAQ and S&P went down. Basically, I lost some unrealized gains – probably like most of you. However, while I can only speculate, the metals are down but far from out.

Yesterday, 11/8/2010, gold tore through $1400 an ounce. It closed at $1403.20 an ounce, reaching an intraday high of $1408.70. Silver closed at a high of $27.43 an ounce. Granted there was the aforementioned fall today, but one may argue that that is a blip. I said investors took profits. If I wasn’t as bullish on monetary value of metals (and subsequently bearish on the US Dollar) I would have taken my gains and bought back. But, I am not a trader. I am an investor and I still love gold.

The fundamental question is: Why did gold rise yesterday? As mentioned in “How the Price of Gold is Determined,” Gold is inherently priced based on either faith in or proof against the US Dollar. The Federal Reserve’s $600 billion stimulus plan may well have been the cause.

Simply, this plan stated that within the next year (or less – targeting sometime mid-2011), the government was going to buy $6,000,000,000 in long term treasuries. This means that they are going to flood the market with that many more dollars. Following upon the holy grail of economics, supply and demand, there will be a greater supply and less demand. However, people still want to retain their wealth, which relegated them to buying something. This something may be a car, collector coins or a Michael Jordan signed baseball bat (from his AA days in Chicago). Or, this could be gold. As stated often, a currency without a country.

Both the flood of dollars which weakens the dollar and the surge to maintain wealth, buy buying a tangible asset like gold, caused gold to go up. Please note this not only affected gold, but almost very other commodity. Moreover, with a weakened US Dollar, investors using other currencies can buy more of things priced in US Dollars.

Technically, logically and fundamentally gold (and silver) show no signs of letting up on this upward movement.