What Does Gold's Price Behavior Mean? 11 comments
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I am no gold analyst, but the metal has always interested and perplexed me. It is supposed be a hedge against inflation as also a savior in bad times – depression/deflation scenarios.
A Business Week report explains:
It can be argued that gold's price spike to a record high of almost $1,030 an ounce last March had more to do with a surge of strength in commodities as a whole than anything specific to the yellow metal. Unable to buck the general sell-off in commodities since the summer, gold sank to a low of $680 in November before rebounding above $800 as the end of the year approached. Now that a new era for commodities seems to have begun—one likely to be characterized by greater price stability—any future gains by gold will have to come on its merits as a perceived safe-haven store of wealth, a hedge against inflation, and as a desirable component of jewelry.
…. cited questions he has received as to whether gold is still a safe haven asset—and if so, why the metal hasn't performed better during the recent economic tumult. Meger believes gold remains a safe haven asset and says it has weathered much smaller percentage decreases in price than have other commodities while avoiding the extreme volatility seen in other financial instruments. In fact, some of the selling pressure has been the direct result of gold's function as a store of wealth with easy liquidity, he points out...
The true inflection point for gold, however, will come when concerns about deflation give way to inflation worries, Meger predicts...
Much like the stock market, which is way ahead of the economy, the price of gold is reflecting the market's belief that the worst of the recession is over, he says.” (All emphasis added.)
The main point is that gold can be sold in times of chaos and disorder, and hence you should invest in it if you expect a major deflation/unemployment/depression scenario. Also, in case of expectations of inflation or high-inflation when the value of currency is falling rapidly, gold can be a proxy as it is real, compared to fiat money (fiat or order by the government that it should be accepted as a means of payment), which is created out of thin air without any real asset backing. As the trust in a given currency bursts, gold increases in value as it is anticipated that gold can be used as currency for payment of goods and services if the currency fails.
Further this distrust in the fiat currency makes governments and central banks jittery, and more so in the case of US dollar, which is a reserve currency for many countries/institutions. The fear that this reserve currency may now change to gold because of the lack of faith in US dollar has lead to manipulation theories where various central banks are supposed to have sold gold in a coordinated fashion to strengthen the US dollar, and the spike from July in USD was as a result of this effort which also squeezed the dollar shorts. Gold in other words is an inverted dollar.
Source: gold-eagle.com
What I understand is that the current move up above $800 is because of the weakening of the dollar due to the Fed rate cut to zero. However, it is expected that ECB and BOE will also follow with their own ZIRP (Zero interest policy) and it would be interesting to watch how US dollar and gold behave thereafter. Also, the current geo-political situation in the Gaza strip and the Indo-Pak situation is supposed to have given it a further push.
Another point made by the Business Week article referred to above is:
Not everyone favors gold, even as a mere hedge against inflation. Historically, the returns on the physical commodity are miserable, although commodity futures are "somewhat more favorable as a diversifier," according to Rick Miller, founder of Sensible Financial Planning and Management in Cambridge, Mass.
Those looking to gold as a store of wealth as part of a doomsday portfolio are better off holding gold coins, which they can keep in their physical possession.
"If the worst happens and you want gold because nothing else is worth anything, being able to say 'I have shares in this gold ETF' and going to the vault of a bank to get it out is unlikely to cut much ice," Miller says.
Prices of gold coins have spiked in the last six to seven weeks due to a shortage of supply and a jump in demand, even as gold futures prices have come down on the Comex division of the New York Mercantile Exchange. The American gold eagle, one of the three most popular gold coins, is now selling for the spot price of $845 plus a premium of $80 to $100, compared with the usual premium of 4.5% to 6.0%—or $38 to $51…
That indicates small investors are moving more and more into gold because they're worried about the economy… (All emphasis added.)
So while physical demand has been strong, the question that arises is why did gold fall to $680? The manipulation theory explained above has been given by many. It is a fact that the paper gold market is 40 times the physical one and the former sets the price. The other reason is the deleveraging or forced selling due to the credit crisis.
If gold prices are the leading indicator, what is its behavior telling us about the possible future economic conditions? It appears to be a ‘heads you win-tails you win’ asset class both in a potential inflationary (or hyperinflationary as some think) situation and deflationary or depression conditions – desire to hold gold should be pre-dominant in both situations. In such a situation, shouldn't gold prices already be at the levels they are projected to be - at $2000+? Why this hesitancy? Is the behavior giving some other signal? Or am I missing something? I look forward to readers’ views and comments.
Disclosure: No Positions.
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This article has 11 comments:
The warehouse stocks of deliverable gold are being slowly drained which will hinder the big banks efforts to 'pile on' and limit upside price moves.
Remember that the big banks own most of the gold. They don't really want to deliver it if a bull market is just getting underway. When push comes to shove they will have to choose between delivering to hold prices down or refraining from shorting and let prices rise. (Option 3 is to break the delivery clause in the COMEX contracts, which will ruin trust in COMEX and likely lead to a new 'official' gold market someplace the banks won't be able to control like India or the middle east.)
The other major factor not discussed above is a change in stance by foreign governments to pare down their dollar reserves and build up reserves in gold instead. China has hinted at this, but there is only limited evidence that they have begun in earnest. If news of serious Chinese gold buying is reported the price of gold will rally.
The fundamentals are improving, but the gold market is still waiting for the spark that ignites a serious bull market upleg.
With all the fiat money being printed in countries around the world, it's only a matter of time before the price of gold responds, IMHO.
I am with you on indicators to observe.
You ask what will happen if other central banks go to ZIRP. Well we will find out this month. What will the currency traders do then?
Exchange rates have a major impact on gold price it seems.
Compare the London Fixes per oz.
Year start 843 US. 425 UK. 575 EU.
March spike 1020 US. 492 UK. 641 EU.
Year end 870 US. 610 UK. 615 EU.
Honest article, thanks. All the best for next year.
generally accepted as and referred to in the investment industry as the quintessential authority on what optimal asset allocation is or should be – period!
</blockquote>did a study of including precious metals investments in portfolios and found<blockquote>...
“that precious metals performed best <b>when they were needed the most</b> by providing positive returns during the years that traditional asset classes had negative returns. Ibbotson determined that investors can potentially improve the risk-to-reward ratio in conservative, moderate and aggressive portfolios by including precious metals bullion with allocations of 7.1%, 12.5% and 15.7% respectively.”<p>... one in the investment community should underestimate the importance and potential effect of this study</b>.(empha... added)
</blockquote>
The Title of the Article is dated December 30, 2008: President of Euro Pacific Capital on Gold and the Dollar.
Read it.
Gold is just entering this phase.
Ever read the "Stock Market Almanac"?
It provides decades worth of information on Equity Sector movements. One can even apply it to present market conditions because it includes Market Sentiment.
IMO
The only reason that I can see why it hasn't held THIS year is attributable to Rotational Forced Selling. IMO