Friday, 16 September 2011

Recent Gold Sell-Off Overblown?

Fri, Sep 16 2011, 15:48 GMT
by Michael Conlon -

Gold has pulled back from its all-time nominal high of $1920 and is now trading close to $1790. This retreat despite the heightened risk in the marketplace shows how versatile gold is and how it can trade differently based on different market conditions.

As seen on the chart below, gold has esentially bounced off of its daily pivot S1 support level at $1765 and looks to be moving higher. But what has changed in the marketplace? Frankly, not much.

There is still increased risk coming from the Euro debt crisis, so yesterday’s move to strengthen the European banks pushed gold lower, though today’s risk aversion has gold moving higher. But one of the interesting properties of gold is that it has historically been used as a hedge against inflation. And yet with yesterday’s move to increase US dollars in the system (provide liquidity), gold sold off.

So the market believes that inflation is not a problem at this point despite the added liquidity which means that gold is trading more as a safe-haven currency. And it also means that there could be bigger problems for the Euro.

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