End of an era or just a normal market function?
Gold Bullion prices fell sharply earlier this week when gold got caught up in short selling before the August options expiry date. The northern summer holidays and recent bank stress test results from Europe have had a negative effect on the gold price but in the long run the markets seem to be bullish for gold for various reasons;
The European bank stress test results slightly relaxed the markets because the sovereign debt risk has moved on the background – or at least that’s what the governments are saying. The ground for every investment is belief, and politicians along with government economists are more than happy to reinforce the fading image of the sovereign debt. Even if the reality is totally different, the governments are prepared to do everything in order to keep up the faith in the financial system. If they fail the result is likely to be a financial disaster, which happened for example in Germany in 1920s in a form of a hyperinflation.
The bad news for the governments is that the truth tends to pop out in the end and as they see the increase in money supply as the solutions to the problem, we might face the hyperinflation again in the future.
The biggest questions mark for gold markets is the U.S and more precisely the FED. The U.S has piled up a huge amount of debt in recent years and cannot afford another recession so they have to turn to the FED to seek a resolution to the problem. Because the price of gold is cited in Dollars and the FED is printing more and more Dollars to save the economy, it is also making gold more attractive in the long run.
The two giant economies from Asia, China and India, are on the way to becoming major players in the gold markets. Especially China has raised its influence in recent years for two reasons; it is the largest financier of America and it sits on an enormous pile of Dollars. Making the Dollar worth less is not in any interest of China. The other reason is the fast economic growth and the market deregulation in China, which will keep pushing the value of the Renminbi up against the Dollar, and the demand for gold is likely to follow.
When talking about the amount money in the market circulation, the numbers are as follows: there are $40 to $50 trillion in bonds and about $30 trillion in equity markets. We are on a historic lows comparing to the 1970s and 1980s when considering the amount of gold in these numbers, it is only 1-2%. It is recommended that investors hold 10-20% of their portfolio in gold so there is still lots of room for gold in the markets spectrum.
To sum up all this, we could say that the recent drops in the gold price could be seen more as a buying opportunity rather than a change in the bullish markets views and getting rid of physical gold might turn up to be a very hasty decision.
Tags: Economy, Finance, Gold, Gold Bullion, Investing, markets