More Downside for Gold & Oil Prices, as
U.S. Dollar Moves Above its Fundamentals

sovereign debt crisisGold and oil prices are having a really difficult time right now and I suspect that the falling price trend will continue for another month or so. The spot price of gold is going down because that commodity was due for a correction and because of strength in the U.S. dollar, which is trading up on worries about the eurozone. Oil prices are going down because of a massive of glut of oil in storage in the U.S. market and due to reduced expectations for global economic growth. It is the age of austerity and, frankly, I think it’s fair to expect a lot of change over the next 18 months, and by change I mean politically, economically and socially.

So far during the recent price correction, the stock market is holding up well. If the S&P 500 Index broke 1,300, I’d be more concerned, but because the market isn’t overpriced, institutional investors will continue to buy dividend yield when the market retreats. As for gold and oil prices; being commodities, they could experience significant price swings for the rest of this year, even as part of a long-term uptrend.

It’s going to be very difficult speculating on the long side in gold and oil stocks over the next several months. Oddly, it seems like the eurozone is calling the shots in U.S. capital markets. At the very least, the sovereign debt crisis is responsible for domestic investor sentiment.

I’m waiting for a bottom in spot gold; when it happens, I believe speculators should jump all over gold-related investments. The only caveat is the risks associated with the euro currency. Any breakup in the eurozone could have a cascading effect on currencies and the resulting “flight to quality” would skew the U.S. dollar above its fundamentals. As gold and oil prices tend to trade inversely to the U.S. dollar, spot gold could be down for a long time, because of the sovereign debt crisis and the resulting currency chaos.

So, it goes without saying that investment risk for investors remains very high at this time. All assets, even real estate values, are vulnerable with currency instability. I don’t know how things will play out in Europe, but the fact of the matter is, Greece never should have been admitted to the euro currency in the first place. In the end, a massive upheaval in the eurozone is likely over the next couple of years and investors need to protect themselves.

Near-term, gold and oil prices should experience more downside, as speculators pile into the trend. I see gold as a very important asset to own for the rest of this decade, but the price of gold will be skewed by the U.S. dollar trading as the only reserve currency. As for oil prices, I figure we’ll see price consolidation around $90.00 a barrel, which will be a boost for consumers and the industrial economy. (See The Winning Stock That’s a Positive Sign for the Economy.) Oil prices are the pulse of capital markets in terms of sentiment and expectations for economic growth. Right now, oil prices are saying things are slowing down.