Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Gold Fear Premium

Commodities / Gold and Silver 2010 May 14, 2010 - 05:52 AM GMT

By: Dian_L_Chu

Commodities

Best Financial Markets Analysis ArticleGold prices were hitting record highs as gold's appeal as a safe haven asset exploded. June gold was down 1.1% to settle at $1,229.20 an ounce on Thursday after hitting a record high of $1,250 in previous session.

The metal’s surge was driven primarily by concern that an almost $1 trillion loan package in Europe will slow the region’s growth and debase its currency. Adjusted for inflation, gold is near its highest since April 1981, based on data at Bloomberg.



Record Investment Boosted by ETFs

Global investors, led by the US, last year bought a record 228.5 tons of gold in the form of bullion coins, up from 77.4 tons in 2000, according to GFMS, the London-based precious metals consultancy.

Exchange-traded funds (ETFs) also have made it convenient for retail investors to get in on gold. Holdings in physically backed gold exchange traded funds are at record highs after some ETFs last week experienced their biggest inflows in over a year.

The largest gold ETF--the SPDR Gold Trust (GLD)--recorded its highest daily inflow since early 2009 last week with total holdings hitting a record 1,185.78 tons.

Pattern Change – Gold & Stocks

Gold tends to rise when investors are uneasy about risky investments, so gold often gains as stocks fall. However, stocks continued to recover from last week's big drop, while gold also broke new highs.  (Chart 1)

Meanwhile, the euro broke through the 14-month low reached against the dollar last week touching $1.2516. Some analysts say a test of the euro's 2008 low of $1.2330 looks likely in coming sessions. These are clear signals that investors' anxiety is with the euro.

Pattern Change – Gold, Dollar & Euro

Furthermore, gold prices usually go down when the dollar strengthens. But that inverse relationship gold previously has with the dollar has now been switched to the euro since late last year due to the sovereign debt crisis in Greece and Europe (Chart 1). 

The lack of faith in the sustainability of the euro has been driving investors to flee the euro and go into gold, stocks and the U.S. dollar. Nevertheless, this is not indicative of any fundamental strength in the U.S. currency. Rather, it's “relatively stronger” against the embattled euro.

Similar to Crude - Gold Has a High “P/E Ratio”

Now, many analysts expect gold prices to fall back near $800 an ounce over the next ten or twelve months, according to Jon Nadler at Kitco Bullion Dealers. Nadler thinks the economic fundamentals for gold are "completely upside down." Demand from jewelry has been weak, and that much of gold's recent strength has been speculative in nature.

However, similar to crude oil, gold also has become an asset class in itself and trades beyond market fundamentals. Gold has long been a safe haven when world markets are gripped by fear. Those fear factors---outlined below--if prolonged, will most likely drive investors to gold and send gold’s P/E ratio soaring far beyond the demand/supply fundamentals.

Fear Factor #1 – Inflation

Analysts say there’s a lot of fear on the part of the Europeans that moves to mitigate debt crisis will only lead to more problems. FT.com reported that traders and coin dealers said buying was exceptionally strong from German and Swiss investors.

The spike appears to reflect concerns in Germany about the potential inflationary impact of the European Central Bank’s decision to buy up euro zone government bonds in the wake of the Greek debt crisis. Outside the euro zone, dealers said that demand was also strong in North America.

Fear Factor #2 - Fiat Currencies Debase

The potential for other countries to be overwhelmed by debt also has investors rethinking paper currencies in general. Gold is vastly appealing as it has become the only reserve currency not backed by debt.

It is this fear that has fueled the price of gold rising against every major currency, not just the thrashed euro. (Chart 2)


Fear Factor #3 – Mountainous Sovereign Debt


The European Monetary Union (EMU) collectively is facing €965 billion of debt redemption this year.  Among them, three of the most heavily indebted PIIGS countries, Spain has to redeem €81 billion of debt this year, Italy at €267 billion, and Portugal with €19 billion. (Chart 3)



The Greek contagion may seem to be partially contained at the moment, but investors are still concerned widespread fiscal tightening could derail the already weak European economic recovery. Continued fears over the stability of the euro zone should further depress the euro and buoy gold prices.

The sheer scale of fiscal deficits facing numerous countries, including the United States, will likely prompt further diversification from fiat currencies and could ultimately propel gold to fresh highs.

Dissimilar to Crude – Not a Real Commodity

As noted earlier, gold is similar to crude oil with a built-in premium due to psychological factors. However, unlike crude oil, which is an essential energy source that the world cannot function without, gold has no real fundamental demand except for the use in jewelry.

Indeed, much of gold's recent run-up has been driven by speculators, which means the correction(s) could be just as ferocious as the climb-up once investors' fear subsides.

Short to Medium Term - Hinges on The Euro

Gold has risen 40% since the beginning of 2009, which suggests the market could be due for a correction. A dip in gold prices within the next 10 to 20 months is certainly possible as European and U.S. markets stabilize.

For now, the general trend over short term basis is still to the upside. But at this juncture, gold looks over-priced from a risk/reward standpoint. Retail/individual investors looking to invest in gold are best to stay on the sideline until a significant pullback, possibly at round $1,130. (Chart 4)




In the mean time, the 1,000-point drop in the Dow on May 6, although still under investigation, is a grim reminder that markets will likely be volatile going forward. Volatility breeds chaos and fear, and gold certainly has a proven record of thriving on both.

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2010 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules