What the collapse in gold means for currency investors

by Joe Oliver, Forex Trading-Pips

The recent collapse in gold has been actively reported across the major news networks, one thing not discussed is the wider impact an imploding gold price may have on the other major currencies. More on this from BK Asset Management….

For the past few years, buying Gold as an inflation hedge was one of the most popular trades championed by some of the most respected investors around the world. Unfortunately as time progressed, patience began to wear thin and investors were seeing their investment values dwindle with no hope of rapidly rising inflationary pressures in sight. Consumer and produce price reports also failed to show any major uptick in price pressures as weak demand prevented businesses from raising prices. Tomorrow’s U.S. consumer price report should show how benign inflation pressures have been in the U.S. as CPI is expected to be have stagnated in the month of March. U.K. and Eurozone consumer price reports are also scheduled for release and while price pressures have been stronger in both countries, there is still more downside than upside risks. As a result, with returns in equities becoming more attractive, a larger subset of investors are giving up on their losing inflation hedge and going on the hunt for yield.

The sell-off in gold also reflects concerns about global growth. Between this morning’s softer U.S. economic reports, last night’s weaker Chinese data and this month’s disappointing U.S. retail sales and jobs numbers, there are definite signs that the global recovery is losing momentum. The U.S. dollar traded higher against all of the major currencies today except for the Japanese Yen on the back of weaker manufacturing activity in the NY region (the Empire State manufacturing index dropped to 3.05 from 9.24) and decline in foreign purchases of U.S. Treasuries. Finally, $1,500 was a key support level in gold and when that broke, the sell-off gained momentum quickly. Stops were triggered, margin calls were made and many investors opted to abandon their losing positions then to add margin.

For Forex traders, there’s a few important takeaways from the move in gold 1) there’s no need to worry about inflation until there are significant and sustainable signs of growth 2) be worried about the slowdown in China and the U.S. 3) beware of how quickly losses can occur when key levels and stops are taken out. In terms price action, these concerns could lead to further pressure on major currencies….More at Why Forex Traders Should Care About Gold Collapse

Dennis Gartman also shares his views on the Gold market sell off in an Interview with CNBC, you can check out the video below…

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