As you all undoubtedly know, gold built on last Friday’s strong gains with an impressive performance during the pit session trading in New York. What is significant about today’s price action in gold is that it moved strongly higher even as the dollar was exhibiting a bit of strength. The dollar’s weakness came primarily from weakness in the Euro as reports out of Euroland suggest some slowing of growth in that zone. That resulted in traders speculating that the ECB would be on hold when it came to a potential interest rate hike this month. Players had been anticipating no change in the ECB’s stance which had taken on a decidedly hawkish position in recent months. That has all come to a screeching halt with the unfolding of the derivative crisis linked to the mortgage and credit sector. Since the Euro had been garnering support against the dollar based on the narrowing of interest rates between the two zones, any potential slowing of this process has bearish connotations to the euro.

I have said all this to say this – weakness in the euro has previously had the effect of weakening gold prices. That has not been the case this week. Euro gold managed to get above a critically significant resistance level from a purely psychological standpoint – the €500 level. I have included an updated chart of the euro gold price thru the PM fix as of this morning so that you can view the importance of this achievement. Should gold hold today’s gains overnight and on into tomorrow early morning, barring a strong upside move in the Euro, the price should fix above the €500 level for two days in a row tomorrow. That will rattle the cages of some European buyers of gold.

We want to see gold begin to move higher not only in dollar terms but also in other currency terms to get excited. In other words, we want to see gold trading as a currency of last resort and not just a “contra dollar play”. It could very well be that the gold market is sniffing out the inflationary implications of this huge nearly global-wide liquefaction process undertaken by the central banks of the world. Considering that August is typically the month that we see bottoms in the gold price as it begins its period of strongest seasonal strength, such an undertaking by the CB’s comes at a time in which plenty of speculators, both short term and longer-term oriented will be looking to establish new long positions in the metal. The combination of strong seasonals ahead and massive injections of liquidity should keep a strong floor of support under the gold market.