Gold prices recently took a dive and with them now sitting below $1500, many are wondering whether this is more than a correction. The critics are arguing that the gold bubble has finally become too obvious to ignore and fear that this will soon grow into a trend. On the other hand, those who are still advocating gold as the ideal hedge against inflation are recommending investors not to sell their positions and turn bearish on the precious metal. With Paul Krugman and Christian Berthelsen among the detractors, it is worth taking a serious look at the short and long-term forecast for gold.
Sentiment Driven Metal Still Glitters
The last decade saw an unprecedented rise in the gold prices and the most fervent supporters were counting on these trends to endure indefinitely. The last six months were more of a roller coaster and the fact that an underlying asset gained and lost as much as 25% of its value, should trigger the alarm flags for binary options traders. Unlike other investors, these thrive during periods of volatility but only if they can accurately predict the next trend. Now that quantitative easing is slowing down and its end is in sight, the price of gold could be well sinking to new depths.
Binary options that expire in a few days or weeks look more like gambling rather than a sound investment, as they could generate both significant profits and losses. On the other hand, on medium and long term, gold is still a reliable inflationary precaution and its prices should be correlated with the numbers coming from the housing market. Prices are frequently sentiment driven and whenever investors lose confidence in the strength of the economy they turn to gold which in turn leads to inflated prices. Contrary to popular belief, the recent decline is not the effect of Americans and Europeans being confident that their economies are heading into the right direction, but the fear of a possible gold bubble.
The Link between Gold and Mining Stocks
Binary options traders enjoy a great deal of flexibility and can tinker with various underlying assets, including mining stocks. These were artificially raised by quantitative easing but they are closely and indissolubly linked to the price of the precious metal. This explains why the aforementioned companies also took a dive when gold and silver prices dipped, and it is only fair to expect them to follow the same trend. This means that those who feel comfortable with hedging strategies can buy call options for gold and put options for some of these stocks, to mitigate the risks of losing money.
While it is expected for gold price to rise, thinking that it will go back to the levels recorded in late 2012 is a bit far-fetched. A surge of the precious metal would be made possible by a doomsday scenario such as the plunge of the US dollar or the dissolution of the Euro zone, both highly unlikely.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.