Commodity Blog

Gold is a hot topic nowadays, experiencing high volatility, yet remaining primary investment medium. Precious metals have always been attractive to investors because of their tendency to keep their value. In times of economic crisis or inflation, for example, the value of paper money might fluctuate, but a hard asset will always be worth something. As a result, traditionally precious metals have been considered a ”safe haven” in times of crises of confidence and economic and financial instability. The question is: can gold keep on its rally? Or buying today would be buying high and selling low?

To answer this question we must consider factors influencing the precious metal. First, let’s look at two major factors on which gold depends: inflation and fear. Inflation usually occurs while the economy is growing. And, as result of growing economy, there’s little fear among trader and investors. Inflation makes investors to diversify, increasing gold appeal. In case when fear prevails, gold serves as a hedge against the unreliability of other kinds of financial assets. As you can see, the two conditions of gold’s performance are quite exclusive: if there’s inflation, there’s little fear, and if investors are fearful, inflation is likely to be subdued. If these two factors (fear and inflation) can somehow come together an optimal conditions for very sharp appreciation will be created. If dollar begins to decline uncontrollably, inflation would be inevitable, causing widespread panic and fear leading to the complete destabilization of the system. If the U.S. currency fails to inspire confidence as a source of value, gold could easily skyrocket to astronomical levels of many thousands of dollars. The problem with this scenario is that it is very difficult to expect the dollar lose its status as the global currency in the next five ten years except if a catastrophic economic cataclysm would destroy the international financial system.

Now we should consider other factors influencing gold. As side note, we should remember that all financial markets are mainly driven by the expectations of the events that may take place in the future, not by events themselves. And most expectations are either negative to the greenback (which is therefore positive for gold) or directly positive for the metal. Some of possible factors that are bullish for gold are: China is going to continue or even increase gold purchases; UAE, Saudi Arabia and other Arab banks are expected to fail, and they are stuffed with U.S. debt; U.S. is expected to have a double-dip recovery, which means another run from stocks and into gold soon; tension in the Middle East is growing; oil prices are expected to climb with the global economic recovery, causing the dollar to tumble; the Comex gold exchange in New York is expected to get in trouble as European countries demand return/delivery of their physical gold in masses; start of wedding season in India.

China is a very illustrative example of country, stockpiling gold on concern that falling dollar will shake the global economy. This country, being the largest gold producer expected to produce over 300 metric tons of the precious metal, does not export any. What’s more, it is going to build up its hold reserves to 10,000 tons over the next decade.

So, what conclusions can be made and what advices can be given? As you can clearly see gold is definitely bullish, remaining a reliable safe haven. Analysts estimate $850-$1,400 as a trading range in 2010. Instead of investing directly into the commodity at this late point in the game, many traders are purchasing future option contracts that allow them to speculate with leverage while managing risk. If you want to participate in the gold market, you have to decide what type of investor you are going to be. A long-term investor who thinks that gold will eventually reach $2,000 should not panic and may want to buy more on a correction. A short-term trader should have already been stopped out. Gold should not be purchased alone as an investment asset. Gold itself is speculative and is susceptible for highly volatile moves. That makes it too risky for the average individual investor. Taking all this into account we can say that gold should only be part of a diversified portfolio which includes other commodities (such as oil). While gold we talked about gold as a ”safe haven”, one shouldn’t think about this commodity as an investment only for troubled times. One of the greatest advantages of precious metals exists regardless of economic and market conditions. Therefore, investing in precious metals looks like a good diversification strategy for a portfolio comprised mainly of bonds, stocks and real estate.

If you have any questions or comments about the future trading for the Gold, use the form below to reply.