Policymakers have a duty to “Eliminate as completely as possible all of the inbuilt elements that are amplifying the booms and busts,” a quote in today’s Financial Times by Jean-Claude Trichet, the President of the European Central Bank.
Let us hope that Mr. Trichet is speaking of derivatives and not just excessive leverage. If derivatives continue to be manufactured we will have more busts and more booms. Derivatives which amplify leverage must stop being created and must be transacted through a documented clearing intermediary. Derivative sellers must use only strong and viable counterparties.
We believe that today was a major cycle turn day and the rally in gold was a result of dollar weakness. Today’s price action demonstrates to us that the dollar strength has ended and a new downtrend in the US dollar was established about 8 trading days ago. In our opinion, this is bullish for gold.