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Gold: A bright spot in an otherwise dark financial world
Standard and Poor’s has lowered the rating on U.S. debt. Europe is in a tizzy over southern European debt. The Obama administration is challenging the rating agency. Although America’s creditworthiness has been called into question, the U.S. bond market is rallying sharply in a flight to quality move.
Additionally, the U.S. dollar, which has been in a multi-year bear market, has shaken off the credit downgrade and is actually up on the day against other currencies. The fiat currencies have been exposed, at least for today. President Obama attempted to calm markets and the stock market responded by doubling the day’s losses. It reminded me of the fable, the emperor has no clothes!
The downgrade in U.S. debt was long overdue and S&P was the only rating agency that had the gumption to call it the way it is. Huge levels of debt coupled with a political environment where our leaders can’t agree or compromise effectively on issues is nothing new. Stocks are dropping, interest rates are working their way to zero and commodity prices are dropping like a stone today, with oil down over $6, copper down almost 20 cents and commodities plummeting across the board. The markets are rife with fears of global recession.
There is only one bright spot, one glittering and shining light in the markets—gold. Gold has appreciated by over $50 today and is actually trading at a higher price than platinum for the first time in many years. This is not a surprise—gold, as I have been writing for months, is the ultimate reserve currency in the world.
So, is $50 a huge move in gold in one day?
Well, gold is certainly in the headlines and the financial news networks are giving gold lots of air time. A $50 move in the yellow metal is a big move but let’s not forget that on a percentage basis it is just under a 3% move. Gold traded around the $300-$400 level for many years during the late 1980s and 1990s—in those days a 3% move only equated to $10 and we saw many $10 rallies and dips in those days. So a $50 move, based on today’s price level, is really not so spectacular.
Additionally, gold’s historic daily volatility is still under 15% and given today’s movements in the commodity sector it continues to trade as a currency and not a commodity. Oil is trading at a 30% historic volatility, copper 23%, the U.S. stock market 31.5%, U.S. bonds over 15% and silver is trading at a historic volatility of 45%. This leads me to believe that there is some real downside risk in silver, the industrial metal. Gold is not parabolic nor is it a commodity at this point. Gold is money, the only true money left in the international system.
There is some risk in the gold market here. The gold market is overbought as the chart clearly shows. The gold story has been around for years now and many investment portfolios and hedge funds have long positions in the yellow metal. These gold positions are saving the day as many other investments are hemorrhaging in this environment. I would not be surprised to see some heavy selling in the gold market in coming days as traders and investors look to cover losses in other investments with profits in gold.
Gold could fall $100-$200 from current levels and still look great. In the long term gold is going higher, much higher. In the short term there is an increased risk of a correction in the gold market. Keep your powder dry—when gold comes down and you start hearing that the gold market is done, step up and buy, you will be glad that you did.
Happy trade hunting…
Other Posts from the Author
- How to Profit from the Changing Chinese Diet - May 15th, 2012
- Emerging Market Demands Mean Volatile Food Prices Are Here to Stay - May 10th, 2012
- Who’s an Uncivilized Jerk? - May 7th, 2012
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