Gold has been one of the hottest investments on the planet the last few years. However only a few people understand that there is a lot of money to be made on the daily, weekly, and monthly, fluctuations of gold. “Gold bugs” will tell you and they are correct its an ultimate store of wealth, hedge against hyperinflation, hedge against US fiscal problems with US dollar, and so on.
I am here to give you a different perspective. All of those are correct, but lets get down to the core of why gold moves and how it does move.
In August, the US got downgraded from AAA to AA from S an P ratings. This caused a huge move in Gold based on Safe haven demand. There are two reasons gold moves, either it moves as a safe haven asset when the stock market is crashing, US political gridlock damages economy, Fed Cuts Interest Rates, Fed prints more money via quantitative easing etc. The move that has taken Gold from 1000 to where is it now is the QE1 and QE2 Programs enacted by our federal reserve.
When you look at the Financial Crisis of 2008, Gold hit a high of 1000, and during the crisis sold off to below 800.
The same thing has happened with the European Debt Crisis, even though gold is still a winning safe haven trade, when big Hedge Funds, are loosing a lot of money they have to sell their winners to cover losses. John Paulson , of Paulson and Co, was the largest shareholder in the Spider Gold ETF GLD. His 13f Filing shows he recently cut a big position in gold. His fund is down 44% this year, and this is from a guy that made billions betting on sub prime mortgages to fail, which means his investors made money while everyone else in 2008 lost. His other trades were doing so poorly that many in the market feared he would have to sell his only big winner gold, in order to help his fund. All other hedge funds followed. This is why we have seen a change in Gold lately.
The ultimate hedge against the world going bad has turned into a regular risk asset. If you follow Gold over the past two months, it falls when the markets are hit hard on European Worries, and it rallies, when good news comes out on Europe and the markets rally. Gold has started to trade alongside commodities as another risk asset, which means it will rise when stocks and commodities become in favor as investors take on more risk with a better outlook for the day or week based on news.
This is a sharp change from earlier in the year. Many people predicted we would see 2000-2500 an ounce gold by early 2012. The only thing they didn’t account for was hw the european debt crisis can cause sell offs even in good performing assets, just like it did in 2008.
As long as we keep the Euro Crisis in Check gold will rise as the central banks of the world work together to pump liquidity into the market. But be warned if another major correction to the markets comes gold will get hit with that correction.Gold though stands to benefit from all the moves central banks must take on to try and improve things. If we get a QE3 gold goes to over 2200 an ounce in 2012. If we get the ECB and more Easing, that will help go higher.
For now, look for gold to trade back and forth below 1800 an ounce based on risk on and risk off trading aversion.