David Morris

OVER the past week, a number of big stories have jostled each other off the front pages. The Greek debt crisis went critical and the odds of European contagion shortened after ratings agency Standard & Poor’s downgraded Greece, Spain and Portugal. On Friday it was reported that Goldman Sachs may face criminal charges in addition to the SEC’s civil ones.

Wednesday’s FOMC statement helped bolster the view that the Fed funds rate could remain unchanged for another six months. Investors have also taken comfort from corporate earnings, which continue to beat analysts’ estimates. The near-term upper targets for US indices remain the significant resistance levels of 11,250 on the Dow and 1,230 on the S&P. These numbers represent the 61.8 per cent retracement of the sell-off from the highs of October 2007 to the March 2009 crisis lows.

It wasn’t so long ago that economists talked about a Goldilocks economy – not too hot, not too cold. Equity investors seem convinced that we’re heading back there as the major indices power on. It’s almost as if the financial crisis never happened. But it did, and it remains unresolved.

The S&P is trading back at the Goldilocks levels of June 2005. Back then, gold stood at $450 and silver just above $6 per ounce. With the two precious metals now standing at around $1,170 and $18.50 respectively, their progress has been pretty impressive since.

In 2009 central banks became net buyers of gold for the first time in over 20 years. The central banks of emerging markets seem particularly anxious to diversify their foreign exchange reserves and increase their exposure to gold. Big players like China and Russia are also likely to increase their holdings further – unobtrusively – if possible. Gold and silver are finally decoupling their inverse relationship with the dollar. Investors are again considering gold as a safe-haven. It is hitting fresh highs when measured in euros, sterling and yen, and while volatility is sure to increase, both gold and silver look attractive.