Categorized | Investing in Gold

Odds Favor Future Price Increases

Guest article by Tom Cleveland of Forex Traders.

Critics of gold ownership have had a field day of late, finally being able to gloat that the precious metal has not been appreciating like gangbusters over the past several months. Yes, gold has been on a decline since last August, but consolidations are natural and good for the market. Brief respites allow for some profit taking and for new investors to come into the fold. Since the millennium crossover, gold has run up from roughly $300 an ounce to well over $1,800 in twelve years, a “six-bagger” so to speak. Few other assets have delivered such extraordinary returns for that same period of time.

The primary argument used against gold is that it has no revenue stream. Gold, like every other commodity, does not have a direct revenue stream; yet, you never hear this argument when people profess that raw real estate is a great long-term investment. In the case of land, one must also fork out a few dollars a year for taxes or improvements before true appreciation is a possibility. Commodity prices reflect both long-term trends and short-term events. In the case of gold, mining costs have risen, and as long as central bankers continue to expand their respective money supplies, the long-term prospects for the metal can only go up.

Many factors influence the price of gold bullion from day to day, but in our modern era of globalization, our economies are so entwined and interdependent that correlations exist between pricing behaviors for gold and other investment vehicles like stocks and currencies. The following chart for the past two years illustrates this point:

One unique occurrence over the past two years is that gold and the U.S. Dollar index have matched returns for the period. Stocks are a weak third, and the Euro and Aussie Dollar were in negative territory. There have been many articles written about how gold affects the forex market and vice-versa, but many of these relationships are often temporary and soon reverse, depending on the situations at hand in the market. The conventional thinking is that gold acts inversely with the U.S. Dollar, as can be seen where peaks and valleys converge where the green circles have been added to the chart.

Many currencies, however, resemble commodities in their price action. For the past year, it is easy to observe the similarity in pricing behavior for gold and both the Euro and the Aussie Dollar. The same can also be said for stocks in the S&P 500 for the same period. The Aussie Dollar is actually referred to as a commodity currency because its value is driven by the nature of exports from Australia – iron ore, coal, and precious minerals and metals, including gold. For these and many other reasons, gold can often be a barometer of the trending direction of the global economy.

As true gold believers are well aware, there are many other reasons to own this special yellow metal. In times of crisis, global capital will seek out “safe havens” in an instant, which typically become U.S. treasuries and precious metals, especially gold. On occasion, gold has also been a hedge against the scourges of inflation since it retains its value when other things are losing theirs. Future prospects are also good on the demand side, as well. Burgeoning middle classes in both China and India covet gold and with their newfound prosperity, it is only a matter of time before this shift in buying habits translates into price appreciation for gold.

The “Golden Rule” is to hold onto your investment bullion until global fundamentals shift, regardless of its loudmouthed critics.

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