All the World’s Gold (Number Sleuth)
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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.
If you have been following Gold for the last three months, you must be astonished by the total return received on the yellow metal, a whopping 109% (annualized return). The yellow metal increased in value by 27.4%. So the question is, what is the reason for the increase in gold prices?
Or the investor sentiment. However there is much more that needs to be said about the topic.
Historically, whenever the price of gold goes up, the world sees an increase in the supply of gold. The supply is from Southeast Asia, notably Pakistan, India, Sri Lanka and Bangladesh, where families have been converting excess savings into gold for the last hundreds of years. Traditionally brides are gifted gold jewellery by her parents when she is married, so there is always an ample supply of gold laying around. Whenever the price used to go up, the increase in supply would temporarily dampen the price increase.
Well that is the old gold. The new gold rush is due to the fear of Fiat currency, and notably the prestigious U.S dollar decreasing in value. Investors seek refuge from inflation and growth fears that have been plaguing the Euro and the U.S. As of now, we know that the Euro might as well call it quits. Germany and France are cornered and they do not have a way to get Eruo debt in control. Their only gameplay is more austerity measures on the Euro countries, and devaluing the Euro, which is taking place unsystematic by the market (unsystematic is a nice way to say, brutally).
Two months ago when the markets were in the fear of Euro, they rushed towards the U.S, because the U.S will always be the safe heaven. Just like the Greeks, the Romans, the Arabs, Chinese empire, and the British empire, the U.S. will always have its cool and be able to repay its debt. (Can you tell if I am being sarcastic enough?) However the market just realized, oh, this is not true any more. There is real growth problems in the U.S. But the bigger problem is the political restlessness that has gripped the U.S, where the politicians bicker and fight about measly decrease in deficits and threaten to default the country. The market will punish U.S for a long time.
As they say it in the olden times; Reputation is like fine china, takes hardwork to keep it in shape, and it only takes one mistake to break it into a million pieces.
I am bearish on the U.S economy, the U.S political system and worst, the U.S social system. As a disclosure, I am long Gold, and will be for the forseeable future.