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Muditha Weeratunga's  Instablog

Muditha Weeratunga
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Currently I am working for an investment firm in Australia with over 7 years of experience in both buy side and sell side. Prior to that I have been working as an associate analyst covering some stocks and then moved to a fund management based role investing in the Middle East region.
  • Why gold is a safer bet in both the short run and the long run

    Short term gold price a function of fear
    I think in the short term gold price movement is more to do with the fear and the investor confidence about the economic recovery than the inflation. Otherwise how can you explain the recent minimum inflation numbers and the increasing gold prices?
    Employment is the key for building confidence
    But if you think of the consumer spending patterns, until there is a recovery in the employment market, it is impossible to create a sustainable investor confidence by simply pumping money in to the economy. So until the employment level increases in the market there won’t be a sustainable investor confidence.
    Weaker confidence --> Gold
    If there is a weaker confidence about the economic recovery then the market is going to have a high level of volatility. And in such a volatile environment the most popular investment is going to be gold.
    Strong confidence --> Inflation and focus on weak sovereign balance sheet --> Gold
    On the other hand if the government stimulus can bring the economy into live we will see an improvement in the employment market. But when the employment picks up, with the amount of money that is available in the system. There is going to be a sudden increase in the inflation. And market is going to focus on the weak sovereign balance sheet. And we have seen that when ever the market focuses on the weak sovereign balance sheet market looses its faith on the paper money.  If there is a sudden increase in the inflation and market looses faith on paper money, then again the most popular investment is going to be gold.
    Long run --> Global inflation --> Gold
    When you think of the long term gold price movements it is more of a story of the inflation. By looking at the growing demand from the developing Chinese middle class and the growing population in India (Indian population is expected to pass Chinese population in 2030) there is only one thing that is possible. They are going to create more demand. And in the developed world governments are doing their best to avoid an economic slowdown in their part of the world. Inflation is a function of the capacity in the world to produce items and the demand for those items. So it is highly likely that there will be an inflationary environment in the long run in the global investment environment. This again creates a favourable environment for gold as an investment.

    Disclosure: No positions
    Jun 19 10:37 PM | Link | Comment!
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