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Considering the turmoil in the Middle East and the spike in oil prices after Libya’s uprising, I am extremely surprised that the price of gold didn’t break $1,420 earlier; it took until yesterday, March 1, to move beyond that barrier, propelling the metal into short-term overbought territory as of today.

I cannot complain about the event from a trade perspective, and have held the famous SPRD Gold Trust (GLD) since February 17, with futures having conquered the 1,367 level that I mentioned in my post “What Do Global Events Mean for Gold?" and triggering the reverse play. Certainly nothing is without risk, and I am enjoying the fistful of dollars that this trade has delivered thus far.

But to bring perspective to the action surrounding oil and gold price movements of late — and everyone knows that the Middle East is the cause — I provide a snapshot in time between 2/18/2011 and 2/24/2011, and highlight the respective price increases for oil, gold, Swiss franc, yen, euro, and the dollar index.

Asset2/18/11 Close2/24/11 CloseGain/Loss
Oil April Futures89.71

97.28

+8.44%
Swiss Franc March Futures1.05791.0817+2.25%
Gold April Futures1,388.601,415.80+1.96%
Japanese Yen March Futures1.20321.2233+1.67%
Euro March Futures1.36811.3805+0.09%
Dollar Index March Futures77.7277.10-0.80%

The February 18 data represents the closing prices for that Friday. By Thursday, February 24, oil had spiked a whopping 8.44%, while gold gained a paltry 1.96%, being beaten by the Swiss franc (+2.25%) and the yellow metal delivered slightly more comfort than the Japanese yen (+1.67%). The euro and dollar index were also affected by ECB inflation “talk”; some resolution to the issue will come to pass tomorrow at 7:45 a.m. EST, when the ECB announces its minimum bid rate ... although one thing to note is that the dollar is usually a destination in times of uncertainty.

Thus far we have touched on inflation, hyperinflation, instability, the apocalypse of “fiat” currencies, and just about anything that would drive gold to new heights, although my opinion runs counter to many. But it appears that gold buyers were distracted watching sports; when they changed to a news channel, they were caught by surprise and rushed to load up on the metal.

If gold reaches for $1,500 I will be that much richer, although it should have been there already — the February 18 closing price of $1,388.60 plus oil’s gain of 8.44% equals $1,505.80. And it’s not as if anyone is asking anything more than a similar reaction as what occurred in the oil market in view of the circumstances.

It may be that we will not have to redesign the dollar bill with a baby picture of George Washington to accommodate a shrinking note, and to add insult to fury, the Swiss franc, that “fiat” currency (nope, not backed by gold) of that little neutral country in the middle of the European landscape, actually beat the yellow metal in the instability game. Even the Japanese came close, with a Debt to GDP ratio approaching 200%.

If I have to place a bet — and that is what financial markets are all about — I would go with the conclusion that gold has seen its better days, especially if the Middle East issues are resolved in a satisfactory manner, and I hope that the outcome is favorable and fulfilling to the Arab people. Having said that, I welcome the ride and shall sit tight until the music stops — or a few seconds before. To me, it’s only a rock which happens to be on my wife’s shopping list from time to time, and I will trade it to my heart’s content ... keeping in mind that the world will not end before all my taxes are paid in full.

And as far as timing is concerned, Warren Buffett added a few words of wisdom to his 2000 letter, part of which I included in my earlier post, and applies to any asset:

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

Lastly, why would anyone sell their gold if they truly believed the hype? The natural behavior would be to hoard gold because “fiat” currencies are going the way of the dinosaurs, just like a farmer will sell some grain to pay the bills and store most of the crop, expecting higher prices. If I'm going to war, I'm not selling my bullets!

Meanwhile, if you haven’t noticed, Goldline’s famous commercials were slightly edited to include the word “potential,” when referring to inflation. Scott Carter now says that gold is a “’potential’ hedge against inflation.” Maybe the FTC got to him as it dealt with Dannon and the claim that Activia “relieves constipation.”

Source: Gold's Unfulfilling Behavior vs. Oil, Currencies