Gold $915, silver $14, dollar index falls, what next?

The euphoria of Wall Street over the bank stress tests and the mere $75 billion in new money required to shore up balance sheets failed to stop precious metals advancing again last week.

Gold closed at $915 and silver above $14 an ounce, while the US dollar index fell to 82.4 below the level that some technical analysts held as being an important support.

There is some logic in the contention that dollar weakness is due to stock market strength, with money coming out of bonds and cash and into equities. Last autumn the dollar rally and market crash showed that the reverse also seems to apply.

Precious metals up

It was also a good week for gold and silver stocks which leverage up on the price of precious metals, and of course rise with the rest of the stock market, as well as falling with it like last autumn.

However, with the summer period coming up – traditionally a soft spot for precious metal prices – there is some debate among gold bugs about what the immediate outlook is for prices. Could it be that selling in May and going away is not such a good idea this year?

Certainly you have to wonder about taking profits on precious metals in this environment. If gold and silver have finally reached a launch pad to much higher prices then sellers today could miss big gains tomorrow, particularly with the dollar index showing distinct signs of breaking down.

One of the theories about the rising stock market – against what it has to be said is not the most favorable economic background – is that the money created by government bailouts and stimulus packages is beginning to find its way into capital markets and inflating asset prices.

Banks issue stock

It is early days yet, and bank stocks look to have risen in anticipation of the stress tests and should now fall back as the reality of equity raising and share price dilution becomes apparent. That is why three banks immediately jumped to issue new stock the moment the tests were published.

But gold and silver should be a definite and obvious beneficiary of money printing by the Fed, so perhaps it is not so surprising to see precious metal prices begin to creep up and the dollar fall. Indeed, once this trend becomes more firmly established it should be self-reinforcing and take precious metal prices sharply higher.

Gold bugs generally see the end-of-the-world as the best scenario for prices but actually a slow global recovery with ultra-lose monetary policy might work much better.