Tuesday November 24, 2009 - 15:01:23 GMT
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Cinneas.com - blog.cinneas.com
FX, Gold and Expectations
The world is watching the meteoric rise in Gold and asking itself what does this mean for the markets in general? Gold is rising for a number of reasons: It is rising because the supply is limited and underinvestment in new mining facilities has meant supply will not rise any-time soon. It is rising because investors are worried about the possibility of global inflation given the extreme levels of liquidity in the system, and it is rising because there is greater global demand. The greater global demand comes as the populations of emerging global economies such as India, China and Russia demand physical assets to diversify their portfolios. Many pundits are anxious that a bubble is forming in the metals given the extreme positioning on the outstanding longs indicated by the futures. We feel this anxiety is ill-found given the supply/demand dynamic.
What does this mean for FX? We believe that this underlying bid for Gold will help support USD weakness going forward, as investors purchase higher yielding currencies in Gold producing countries notably the AUD and CAD. For this reason we continue to favor selling the USD on rallies. Over the past few months this has been a choppy trade as a result of this 'bubble' anxiety. However experience has taught us that a good amount of chop comes before the 'big move'.
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