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Wednesday, September 5, 2012

Is Gold Overbought?





Market is rife with the news about rising gold prices every day. In one of my previous posts I had discussed reasons responsible for rising gold. There is no foolproof methodology for determining whether this yellow metal is overbought or not as it is determined by demand & supply scenario.
But gold holds an empirical relationship with crude.
 Gold prices are expressed in dollars per troy ounce. (1 troy ounce = 31.1 grams) while crude prices are denoted in dollars per barrel.
The ratio of gold price to crude price has been found to settle around 15.
By this time spot gold is trading at 1691 $ per ounce while Nynex crude is hovering around 95 $ per barrel.
This gives gold to crude ratio as 17.8.

Gold prices are also juxtaposed against silver prices. Gold to silver price ratio have been found to hover in the 50-60 range.
Presently silver is trading at 32 $ per ounce and this give the aforesaid ratio as 52.84.
Gold is rising in the hope of stimulus package from the US Federal Reserve under which US fed pumps money in the economy (by buying bonds) to stimulate the fledgling US economy mired under the huge debt better termed as Quantitative Easing (QE).
This excess money flows into commodities especially gold as it used as a hedge against the inflation resulting in higher gold prices.
But following a severe reprimand from Republicans it will not be easy for the US fed to go with its stimulus programme.
If US Fed fails to implement the QE3 gold may see a decline.

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