Gold Prices and the Banking Crisis

Last week the world received confirmation of just how dire the US and global banking crisis really is.  Whilst the problem stems from the US and any really effective solutions have to be initiated by the US as well, the rest of the world and the UK in particular are equally badly affected.

Treasury Secretary Henry Paulson hopes that this week will see finalisation of the massive $700 billion bail out deal, but there’s quite a few people who don’t think that the final deal that congress approves will be exactly what Paulson had hoped for.  In fact, any deal isn’t the end of the story, it’s really only the beginning as it will almost certainly herald the start of a full-scale reform of the US and global banking industry.

Over the past two weeks, long-term investors have purchased more than 113 tonnes of gold while at the same time European Central Banks have only sold 5 tonnes – proving that the savvy are choosing to bank their cash away from the volatile, out of control and ill regulated banking industry at least until the entire industry can be cleaned up, brought to account and turned around.

Short-term traders continue to buy back their positions on the dips and still have a lot of mileage before they’ve closed all of their shorts.  If the Paulson bail out package is as convincing as it needs to be, there will be a subsequent price rise accelerated by funds closing their short positions as quickly as possible.  Physical gold buyers in the Middle East and Asia, especially in India, are all buying on the dips giving good conformation of support around the $880 level.

The US dollar, the primary instigator for an acceleration in gold values, has slowed a little in its decline against the Euro - but this will possibly only be temporary as more bad US financial data continues to creep out.

Through the start of the week gold prices are expected to dip below the $880 support level possiblly to around $850 before they start to recover - maybe going as high as $900 before settling back around the $880 level.  When it stabilises at this point gold will almost certainly be ready for it next big step towards the $1000 mark or even higher.

The banking sector dramas are a long way from over, and so it seems very much the right time to move into gold as a long-term and stable investment if you like to follow the trends of the savviest investors.