Precious Metals |

Why Bretton Woods Ended

… or at least one of the major reasons why the “gold-backed U.S. dollar” post-World War II monetary system met with a speedy demise in 1971 after the U.S. government embarked on a “guns and butter” spending spree back in the 1960s.

Courtesy of Nick Laird at Sharelynx who once again has managed to produce a chart that says more than words could ever say about the evolving global monetary system that, lately, appears to be getting a little unstable.

Russia Continues to Buy Gold

While their total is likely dwarfed by what goes unreported in China, the Russian central bank was, by far, the biggest buyer of gold during the third quarter as shown below in the World Gold Council’s latest report on Gold Demand Trends.

I suppose if I were Vladimir Putin here in 2014, I’d be trading in U.S. dollars for gold too, particularly given the developments in Ukraine so far this year and after the metal’s price has fallen to such low levels in recent weeks.

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The U.S. dollar has become about the only thing that matters for precious metals these days as, along with the rest of the natural resource sector, gold and silver are being pummeled by investors and traders with each move higher for the dollar. This is consistent with the well established inverse correlation between these asset classes and, absent a substantive change in course for the dollar, it’s hard to see how precious metals can rebound.

Gold and SilverThe Federal Reserve policy committee gathers this week and it is possible that the central bank could present a more dovish stance than expected.

This could bolster the metals market and commodity prices in general, as could renewed safe haven demand arising from U.S. military action in the Middle East or a buying surge in Asia at the beginning of a seasonally strong time of the year. But, for the time being at least, the dollar is in charge.

The gold price saw its biggest weekly decline since a drop of 3.6 percent in late-May and it now sits at its lowest level since early-January. This comes after the trade-weighted dollar strengthened for the ninth consecutive week, rising to a six-year high against the Japanese yen in the process. Given the surge in the dollar and gold’s response as shown below, it seems it could have been much worse for the yellow metal in recent weeks.

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Gold snapped a three-week losing streak and saw solid gains last week as a result of renewed safe haven demand, but silver registered losses for the fourth straight week, following the broad commodity market lower. A stronger U.S. dollar has been a key factor in limiting recent gold price gains and, with the eurozone economy now stumbling badly, the strong inverse correlation between the two could continue to hold metal prices in check.

GoldU.S. stocks and bonds both rose last week and this too limited the upside for gold while the latest ETF flows indicate U.S. investors may again be souring on the metal, due in part to its inability to break free of its recent trading range.

hysical demand in Asia remains weak during this seasonally slow time of the year, but with prices still relatively low, gold buying in India and China should pick up in the weeks ahead.

Geopolitical tensions between Russia and the West over Ukraine along with ongoing violence in Iraq and Gaza continue to be about the only supporting factors for precious metals. Absent this safe haven demand, it is reasonable to think that gold and silver prices could be much lower since global demand has been lacking, however, none of these conflicts appear headed toward long-term resolutions and should continue to lend support…

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metals commentary that Tim only shares with subscribers, join Iacono Research.]

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