Archive for September, 2011

Gold fundamentals

September 26, 2011

This past friday, gold spot prices fell. Then I watched this lady on TV saying that she believed gold would bounce back because fundamentals remained strong.

I don’t do commodity trading although I know a bit about “fundamentals”. I really don’t understand what she meant by fundamentals though.

Commodities such as copper, iron, and in particular gold, increase in value under certain situations:
– Currency depreciation.
– Inflation (because it’s really, currency depreciation).
– Demand.
– Expectation of any of the above three.

None are because of a fly to safety.

If you open up a gold chart, you’ll see that it has more than double in the recent years. Mainly because people thought that inflation was going to shoot up, depreciating the currency and therefore increasing the demand for the metal. Anywhere you go here in Spain, you’ll now see “we buy gold” signs.

I’ve watched lot of interviews saying that gold would keep going up because on times of uncertainty, they buy the metal. I never agreed with this and it’s about to be tested. There is a huge worry about Greece defaulting and Europe collapsing with it. Gold should be shooting to the sky today but… this is today’s Yahoo Finance headline: “Gold eyes biggest 3-day fall in 28 years, investors flee”. Where are they fleeing for safety you wonder? cash.

The problem I see is that the only reason demand on gold has increased is because of expectations that it would keep going up. But no expectation about inflation or currency depreciation has happened yet.
Does this mean that gold will crash? I don’t know. But what i’m sure is that “fundamentals remain strong” is marketing bs. While inflation is low, interest rates are low and gold is not really demanded for any purpose but to speculate, there are no fundamentals in there to justify its current price. The only way you could justify it is if the expectations are in fact correct, in which case, they are already baked in and gold should not go much higher. But markets are not rational, so it can go anywhere until reality sets in.