Sunday, March 8, 2009

Gold for the haven?

The Economist recently published an article on gold, which I find very interesting. A very nice quote sums up everything that I will be talking in this article: "the beauty of gold is, it loves bad news". Looking at the Gold commodity price, it has gone from $800/ounce before Christmas to close to $1000/ounce February, and currently is at $937.30/ounce, while the stock market has fallen to the lowest level since the Great Depression. Citigroup for example has fallen 95% in value compared to this time last year (fallen from $21/share to $1.03/share, data 6/3/2009). Gold is up 6.6% this year while the whole world is in deep recession. Last week Gold gained 20 cents, and is advised by more and more analysts to buy.
The reason:
The explanation is probably because people have long viewed gold as a hedge against high inflation and weak dollar. Historical data showed that a rise in the value of gold often comes when there was a fear of inflation, like when commodity price rose last year triggered the fear for inflation, which caused gold to break through the $1000/ounce mark; the weakening dollar in 2002-2005 also caused gold to rise. However, at the moment when the dollar has gained strength and the fear of inflation has faded, the gold still remains strong. The article pointed out that Gold's recent progress seems to be a response to generalized fears of economic turmoil. When safe savings vehicles such as bank deposits look somehow unreliable and offer low returns, gold has greater appeal. Gold also helps each way when the government cuts rates. If rate cuts are successful, inflation is fueled, which is hedged by holding gold. If cuts aren't successful, assets will lose value, and by holding gold investors stay unaffected, or so they think.
The estimations:
The article showed that price might reach $2300/ounce, which match the peak in January 1980 in real terms, according to gold bugs, and already god price is above its average since 1972, calculated in today's money. It seems like, exactly as what I said earlier, gold loves bad news, and with the grim situation of 2009, gold will be gaining value still during the year.
Why don't we all buy gold now?
Even though gold production is not likely to change in the near future, and the recent news suggests that we should all be switching to gold now, there are some concerns. The supply of gold is limited, while there are lots of potential buyers, and this is an ideal condition for a bubble-says an expert at Morgan Stanley. The global decrease in demand level should also be considered, with the fear of deflation and the rise of unemployment, the price of gold might be as well affected. Some precautions should still be taken when we consider buying gold, but it seems like a very promising investment at the time of crisis such as now. We should watch and see if gold price really shoots up to $2300/ounce like the gold bugs say, or will it be just about this $1000/ounce for the rest of the year.

1 comment:

  1. Hey NA!

    Great Entry, your organization has much improved and your arguments were easier to follow. However, I would love to see what "you" think is going to happen based of fundamentals, it seemed to indicate you were bullish throughout your entry, however at the end you said well maybe we should wait and see. If you can't think of a way to get a price target (if you don't look at technicals or other valuation methods), try saying the general trend for the next quarter or the next month.

    Also, if you are interested, I have an interesting article on "gold good for the short" I examine currency movements and possible outcomes for gold. I will re-examine this later. As the first quarter is coming to a close.

    However, back to your entry, If the dollar continues to strengthen, if the gold/commodity relation does hold, I find it hard to see gold rallying anymore.

    However, though on a fundamental view, I do see a weak US economic conditions leading the rest of the world economies first which might indicate dollar weakness (though one would argue this can only be fundamentally led as effects of interest rate cuts are negliable as they are practically zero), which would mean gold continue to rally.

    Overall though on a whole i think this rally will meet a temporary downward whipsaw as many speculators will be taking profits, and as much of the current gold rises are highly speculative (at least the sentiment i get from reading headlines).

    Anyway, I'm very impressed on the improvement of your blog entry. Maybe next time give me a good solid stance of your view so one can assess your analysis/performance.I would love to hear your forecast on a follow up comment!

    Good work and cheers!



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