Gold prices continued to drop last week, and early this week, despite last Wednesday’s announcement by the Federal Reserve that they would continue their bond buying program and Friday’s less-than-stellar jobs report (both of which should have been good news for gold). However, there may have just been a bit of a reactionary lag by investors because, on Wednesday, gold had a bit of rally finishing at $1,285 an ounce and the yellow metal took another jump on Thursday to $1,313 an ounce.
Along with a number of other economic indicators, the continual drop in the value of the dollar is a major sign that this could be the start of a larger rally. On Thursday, the dollar dropped to its lowest value since mid-June due in large part to the data showing a rise in new claims for jobless benefits. The Fed’s bond buying is pumping more money into circulation which lowers the value of the U.S. dollar. A weak dollar is a strong sign that gold prices should be increasing and the recent rally may just be the start of something bigger.
In addition to the drop in the value of the dollar, HSBC’s Jim Steele told CNBC that gold has been “bolstered by bullion demand from China and India.” As gold prices have dropped, China and India (two of the world’s largest gold buyers) continued to provide a huge demand despite a dropping demand from North American institutional buyers. This has prevented gold from dipping further than it did. So when American investors regain confidence there could be, as Ron Paul has said, “an explosion.”