FX Fundamental Analysis GOLD
Currently at $1526, below its best levels of around $1566 earlier this year, with anecdotal yet somewhat ironic evidence in some depressed cities reflecting that the few people doing well happen to be the semi-permanent yet perhaps ultimately transitory retail buyers of the precious yellow metal. Given the 300% or so rise from $561 in the past 5 years the numeric appreciation of this boom is somewhat reminiscent of the tech-stock bubble circa 2000 with a cycle that was bid on every dip and on the whole trending higher. Tat market seemed too good to be true at the time and eventually this proved to be the case, but it sure had a good run and squeezed the shorts before fundamentals finally realigned with a sharp fall in prices, never yet regaining those loſty heights.
Who is to say what will happen next in the gold market and what constitutes a bubble anyway? Some arguments suggest it’s simply a combination of the bigger fool theory that can then become embedded and fed by a lack of credible information/ ignorance,
coupled with voracious
appetite/greed of buyers. Once started, an increase in a bubble’s size is inevitable, especially since buying downside insurance using liquid and efficient options markets has not really been economically practical until relatively recently, which made it difficult to express a viable bearish view on certain commodities.
10 FX TRADER MAGAZINE July - September 2011
Te bottom line is that gold may have been in a bubble for several thousand years so why should it stop now? One reason that gives credence to this argument is the apparent discovery that almost $7 billion of US Dollar bills that were sent to Iraq and intended to be distributed, ensuring the post-Saddam economy got off to a good start, have gone missing, and on a worst case, potentially stolen. Not so easy to heist gold in that way so as a store of value it definitely makes sense from that standpoint. On the other side of this equation we have the simplistic yet true example that even if one buys gold and the price of the base metal rises, once costs
once habits become embedded. We have oſten seen the expensive theoretical cost of fighting market trends but gold is certainly an enigmatic puzzle and although the theory behind a gradual yet sharp rise in valuations is relatively easy to grasp, the fact remains that gold as a means of speculation to preserve capital or generate wealth might be best left alone at these relatively elevated levels, particularly as supply and demand are the driving fundamentals in any valuation and these two key criteria with respect to their direct effect on bullion prices are extremely unknown, when all is said and done.
We touched previously on the prospect of a remote yet still possible chance of a ‘super-revaluation’ of gold, for example an ounce of gold could be allocated a new worth or value of a huge multiple vs. its current rate, enabling owners of gold to cash the metal in for larger quantities of the currency in concern
of carry, insurance, commissions, capital gains and sales taxes are accounted for, it would be amazing if most participants ever actually made a profit from owning the metal, timing would almost have to be perfect, which in itself would be a precious and rare commodity in FX or any market.
In times of uncertainty people flock to their comfort zone, where they feel safe and with who or what they know. Misery loves company and history tells us that in times of angst, gold prices rise and human behaviour is very hard to change
thereby allowing holders to pay creditors in effectively devalued paper currencies. Tis is a reach but anything is possible in currency and commodity markets. In the same article we also suggested a theme that we think is more realistic, in that food, irrigation and arable land may eventually turn out to be the new ‘gold’ or stores of value as the global population rises and implementation of more efficient methods of food production become necessary amid scarce resources like water, crops and effects of unpredictable and indiscriminate weather patterns.
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