I would like to talk about the gold price. Is it a good projection of the real value? People tend to go in Gold because it is stable in value, but I think the have gone to far.
Let me sum up some reasons why I am bearish.
- When we have low economic activity people tend to sell their gold for cash.
- In times with low economic activity people buy less gold.
- Basel III turns gold to a tier 1 from tier 3 capital
The most significant change is moving gold from its tier 3 status to tier 1 capital as 100% loan-backing reserves, the same as cash and bonds. For the first time in 42 years, gold is being brought back into our financial system as money. All the world's banks are now storing this metal, not as some 3rd rate "asset", but as all the world's working capital - its money. This means banks are going to sell some of their gold reserves. Look what happened to oil it was topping at $100 and from there it went back down to $85. Why because there is low economic activity and gold is stable in value but what is it worth when there is low demand for it. Especially when the price is so high.
The gold reserves of countries is in an up trend the last years but how long will it last. Governments are likely to sell some of their reserves now because of the price. The would trigger a chain reaction and would bring gold back to a more realistic price around 1200$-1400$
Investors are afraid of this high prices, they think it's a bubble that is about to pop again. And did we reach the bottom of the recession yet? I think we almost have so that would be another reason to sell it.
Now I will list some things what could increase the gold price.
- A global recession
- Production problems with gold
- Banks and governments buying lots of gold for reserves and holding on to it for a long time.
These are all things that could happen, so that is why it is so hard to predict the price of gold. Investors find all kind of reason what would get them bullish on gold.
In their May 31 Market Alert, the researchers at CPM bravely expose certain myths and misconceptions surrounding gold and banks -central or otherwise- as follows:
There is an aura of desperation in the internet gold press, as those who still expect gold prices to rise grasp for any-thing that could be interpreted as being potentially bullish for gold. The collapse of the euro, a stock market crash, a Chinese 'recession,' and other potential catastrophes are pointed to with glee. Other potential developments within the gold market are being trotted forth by gold marketing groups as reasons to believe gold prices inexorably must rise sharply...
I hope you can use this article for a better view on the gold price and its pros and cons. Don't forget to subscribe to my blog and share this site with friends!
- The Bearish Bull
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.