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The Fear Premium of Gold
By Dian L. Chu, Economic Forecasts & Opinions
Gold prices were hitting record highs as gold's appeal as a safe haven asset exploded. June gold was down 1.1% to settle at $1,229.20 an ounce on Thursday after hitting a record high of $1,250 in previous session.
The metal’s surge was driven primarily by concern that an almost $1 trillion loan package in Europe will slow the region’s growth and debase its currency. Adjusted for inflation, gold is near its highest since April 1981, based on data at Bloomberg.
Record Investment Boosted by ETFs
Global investors, led by the US, last year bought a record 228.5 tons of gold in the form of bullion coins, up from 77.4 tons in 2000, according to GFMS, the London-based precious metals consultancy.
Exchange-traded funds (ETFs) also have made it convenient for retail investors to get in on gold. Holdings in physically backed gold exchange traded funds are at record highs after some ETFs last week experienced their biggest inflows in over a year.
The largest gold ETF--the SPDR Gold Trust (GLD)--recorded its highest daily inflow since early 2009 last week with total holdings hitting a record 1,185.78 tons.
Pattern Change – Gold & Stocks
Gold tends to rise when investors are uneasy about risky investments, so gold often gains as stocks fall. However, stocks continued to recover from last week's big drop, while gold also broke new highs. (Chart 1)
Meanwhile, the euro broke through the 14-month low reached against the dollar last week touching $1.2516. Some analysts say a test of the euro's 2008 low of $1.2330 looks likely in coming sessions. These are clear signals that investors' anxiety is with the euro.
Pattern Change – Gold, Dollar & Euro
Furthermore, gold prices usually go down when the dollar strengthens. But that inverse relationship gold previously has with the dollar has now been switched to the euro since late last year due to the sovereign debt crisis in Greece and Europe (Chart 1).
The lack of faith in the sustainability of the euro has been driving investors to flee the euro and go into gold, stocks and the U.S. dollar. Nevertheless, this is not indicative of any fundamental strength in the U.S. currency. Rather, it's “relatively stronger” against the embattled euro.
Similar to Crude - Gold Has a High “P/E Ratio”
Now, many analysts expect gold prices to fall back near $800 an ounce over the next ten or twelve months, according to Jon Nadler at Kitco Bullion Dealers. Nadler thinks the economic fundamentals for gold are "completely upside down." Demand from jewelry has been weak, and that much of gold's recent strength has been speculative in nature.
However, similar to crude oil, gold also has become an asset class in itself and trades beyond market fundamentals. Gold has long been a safe haven when world markets are gripped by fear. Those fear factors---outlined below--if prolonged, will most likely drive investors to gold and send gold’s P/E ratio soaring far beyond the demand/supply fundamentals.
Fear Factor #1 – Inflation
Analysts say there’s a lot of fear on the part of the Europeans that moves to mitigate debt crisis will only lead to more problems. FT.com reported that traders and coin dealers said buying was exceptionally strong from German and Swiss investors.
The spike appears to reflect concerns in Germany about the potential inflationary impact of the European Central Bank’s decision to buy up euro zone government bonds in the wake of the Greek debt crisis. Outside the euro zone, dealers said that demand was also strong in North America.
Fear Factor #2 - Fiat Currencies Debase
The potential for other countries to be overwhelmed by debt also has investors rethinking paper currencies in general. Gold is vastly appealing as it has become the only reserve currency not backed by debt.
It is this fear that has fueled the price of gold rising against every major currency, not just the thrashed euro. (Chart 2)
Fear Factor #3 – Mountainous Sovereign Debt
The European Monetary Union (EMU) collectively is facing €965 billion of debt redemption this year. Among them, three of the most heavily indebted PIIGS countries, Spain has to redeem €81 billion of debt this year, Italy at €267 billion, and Portugal with €19 billion. (Chart 3)
The Greek contagion may seem to be partially contained at the moment, but investors are still concerned widespread fiscal tightening could derail the already weak European economic recovery. Continued fears over the stability of the euro zone should further depress the euro and buoy gold prices.
The sheer scale of fiscal deficits facing numerous countries, including the United States, will likely prompt further diversification from fiat currencies and could ultimately propel gold to fresh highs.
Dissimilar to Crude – Not a Real Commodity
As noted earlier, gold is similar to crude oil with a built-in premium due to psychological factors. However, unlike crude oil, which is an essential energy source that the world cannot function without, gold has no real fundamental demand except for the use in jewelry.
Indeed, much of gold's recent run-up has been driven by speculators, which means the correction(s) could be just as ferocious as the climb-up once investors' fear subsides.
Short to Medium Term - Hinges on The Euro
Gold has risen 40% since the beginning of 2009, which suggests the market could be due for a correction. A dip in gold prices within the next 10 to 20 months is certainly possible as European and U.S. markets stabilize.
For now, the general trend over short term basis is still to the upside. But at this juncture, gold looks over-priced from a risk/reward standpoint. Retail/individual investors looking to invest in gold are best to stay on the sideline until a significant pullback, possibly at round $1,130. (Chart 4)
In the mean time, the 1,000-point drop in the Dow on May 6, although still under investigation, is a grim reminder that markets will likely be volatile going forward. Volatility breeds chaos and fear, and gold certainly has a proven record of thriving on both.
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WOW! Three logical people in a row, I'll be damed, that's a first even for this board.
"...and trades beyond market fundamentals. "
Bell ringer. 98% Bulls. Look out below.
You people are friggen CRAZY!!!! LOL. WTF ARE YOU GOING TO DO WITH YOUR 'GOLD' IN A COLLAPSE?? IF YOU'RE TRADING IT THAT'S FINE BUT IF YOU THINK YOUR 'GOLD' IS GOING TO DO ANYTHING FOR YOU WHEN AND IF MONEY COLLAPSES YOUR DELUSIONAL! YOU PEOPLE ARE WORSE THE NEO NAZI'S, LEFT WING LIBERALS, ULTRA CONSERVATIVES, AND GAY GROUPS FROM SAN FRAN. PUT THAT PASSIFIER BACK IN YOUR MOUTH AND SHUT THE F UP!
IT'S MANIPLATED AND WORTHLESS JUST LIKE PAPER MONEY...
THEY NOW HAVE GOLD VENDING MACHINES!?!??! IF THAT ISN'T A SIGN OF A TOP NOTHING IS!
Good point
Hey sexy!
Central banks will do anything, pull out any stop, to keep gold, their mortal enemy, "managed".
They've always been able to do that during the last 100 years.
What reason is there to assume they'll fail this time? (I hope they will fail, but that's just a hope).
Yea man you right snoopy, central banks control the money supply and everything else but they cannot control gold.
That picture is pefect, it depicts you intellectual age perfectly...
What reason is there to assume they'll fail this time?
Because of the internet, common sense and the speed of truth. And because all great ponzi schemes come to an end - the Laws of the Universe (like Mother Nature) are far more powerful than thinking men.
Ever read Jeremy Narby's "The Cosmic Serpent - The Origins of Knowledge and DNA"?
In the book he discusses how and why plant and tree life are far more intelligent than man - predating his existence on earth by, say, oh, about 4.5 billion years. As if man has a chance against the laws of ethics, the universe or mother nature. There won't be a FED Reserve anymore in say 20 or less years.
Since golds rise from $250 an OZ, the critics have been out in force , especially those short gold for whatever reason.
Selling the illusion of make believe ponzi paper ,is much more easily used to fool the masses into believing they can spend and go into debt based on make believe profits.
Who does this economist work for and what are his intended reasons for posting this article?
The American Dollar will strenghten temporarily, but is doomed like all other fiat currencies. America is friggin broke, just like most nations. Any idiot savante that is touting the greenback is in for a rude awakening.
brovo why are you even the talk
your out of work /// as if millions a day MAKES a persons or bank ligit
and what does cheating on frontruning the stock market have to do withtrading prowess.
its kind of like your input garbage out. .. from a basis of nothing
Does dumpster describe your 3 grade writing ability errr where your gold is going to go very shortly?
So Mr. Bravo (if that's your real name) if/when the public sees their money being devalued on a daily basis what is the public going to buy?
I'd say the answer is pretty fundamental. They are going to buy assets, physical assets. Even second hand cars become assets in an inflationary climate.
Now go stand in the corner and think about what you are saying.
I would seriously love to know what analysts (besides Nadler) are saying the fundamentals are upside down.
Perhaps HE doesn't understand the fundamentals and should just invest in Platinum, Rhodium and rubber ducks.
If anyone seriously thinks everything will just sort of work itself out buy Platinum and Palladium. If not you better buy some gold.
If you are not sure buy all three and some Silver just for walking around money.
See investing is easy.
Ooohh... oooohhh.... pick ME!!!
I'm an analyst that thinks that the gold price is upside down.
I guess that I should believe a bunch of non-traders and non-economists that buy gold instead of say... JPM or GS.
No, chumbawamba and GG obviously know so much more than GS. It's why they make TWO hundred million a day trading, killing the shit out of GS's hundred million a day...
Bravo... Anyone who ends his posts..
I am chubbybowbow is definitely a genius. Him and the Rocky Raccoon are dipshits. Rocky R will start laying down the definition of a troll and start talking about your mom if talk smack about gold. Furthermore he said he sold gold coins and then denys it!
LMAO!!!
No, chumbawamba and GG obviously know so much more than GS. It's why they make TWO hundred million a day trading, killing the shit out of GS's hundred million a day...
Hmmm....maybe GS's $100 million days are going to come to an abrupt end.
If you're so sure that Gold is going to crap out, why not short it and make a killing?
Or did you already try that and get blown out of the water?
In 1980 dollars the price is only about $462.
In order to equal the 1980 high we would need to trade at $2236.
If I were as short as you, I'd keep my legs crossed and my big yap firmly shut, Sunny Jim.
But you're not are you? You aren't even in the market. GS has probably stitched you up with some dodgy little money market fund that you can't afford to get out of.
Oh well.
Jimmy is a tiny man with an even tinier penis.
He has to compensate somehow.
Give him a little slack.
The spike reflects concerns over GOVERNMENT
Do some research of history (NOT 1900's but the 1800's and beyond) before writing something as silly as this
It's driven by concerns over government!!! NOT SPECULATION
"It's driven by concerns over government!!! NOT SPECULATION"
LOL. Isn't betting on what is GOING to happen speculation?
Oh wait, I forgot. The goldbugs here know the future. They're not speculating, because they "know."
http://inflation.us/videos.html
watch that JB
Good stuff! Thanks for the link. It's going into my link library.
Just like the alcoholic, reform does not take place until a bottom is hit.
The best we can do is hasten that bottom: Take the plug out of the jug and print up some more money. You ain't seen nothin' yet. More to come.
OH YOU??! YOU ON AN ARTICLE TITLED 'GOLD'? WHAT A SHOCKER!?!?!? YOU ARE A LOSER GOLD SALESMAN!!!!!!!
Hey big boy!
Wanna dance?
Rocky, come out from your AKAK.
Hey sweetcheeks, wanna hit the Manhole this weekend?
Look out for the yipper akak, he is under age and you will wind up in jail!
LOL. Isn't betting on what is GOING to happen speculation?
Oh wait, I forgot. The goldbugs here know the future. They're not speculating, because they "know."
Exactly. And because they know, they are extremely allergic to alternative views. But to be honest, I would be nervous if I had bought @ 900+, had no idea about the market and was scared of a general breakdown of "law and order".
Can you imagine the trauma?
- long @ $900
- armed vandals at the gate
- daughter & wife turning tricks on the Southside
and then CNBC says the Greeks have found 4 trillion dollars in the fridge and are proposing to bail out California.
SELLER!!!!!!!!!!!!!!!!!!!!!!!!
"Now, many analysts expect gold prices to fall back near $800 an ounce over the next ten or twelve months, according to Jon Nadler at Kitco Bullion Dealers. Nadler thinks the economic fundamentals for gold are "completely upside down." Demand from jewelry has been weak, and that much of gold's recent strength has been speculative in nature."
The demand from jewelry has been weak?
What?
Volatility in sovereign debt is what is fueling speculation in precious metals, not just gold. To make projections 10 to 12 months out as per historical trends, in this era of volatility, is to be disconnected from reality.
There is no "market behavior" in the historical sense. What we have now is cause and effect. Any incident which reveals true price, in housing or equities, or uncovers bond risk, sovereign or municiple, will drive what ever it is we have. But to call it a market is very unwise.
----------
In general terms, there is no long term investment strategy as per USD. Strategies must be global to make sense from a large portfolio standpoint.
Corporate performance will not be able to offset real negative growth in the US market. Unless of course you are a big bank. But, for normal "intrinsic" value, unless there is a restructuring of US debt, and workable fiscal and monetary policies, we could see negative overall growth (austerity, you have just lost your benefits, type of growth), with price deflation in government backed bad debt, and price inflation in energy and food. With potential hyperinflation in health care, unless it is no longer subsidized by government.
Its hard to know exactly, because its difficult to know what will break first.
Mark Beck
To make projections 10 to 12 months out as per historical trends, in this era of volatility, is to be disconnected from reality.
Mark,
all forecasts beyond the next two to three minutes are nonsense. Weathermen, brokers, think-tanks...all "surplus to requirements"
When I see "analysts" revising their forecasts from one quarter to another I have to laugh. Swings of up to 100% are not uncommon.
In Germany the Government is considering cancelling their contracts with the "Great Predictors" because of their lousy track record.
These people earn massive salaries collating information from the past and extrapolating future trends.
If they knew anything at all they would trade the markets and eventually buy the world.
Although they would probably fuck that up too.
You would think that if Dubai is installing gold coin ATM machines this would be a good indication that gold and silver coins are a secure form of currency. I am keeping my coins.
Or it just might indicate a bubble in speculation...
Oh wait, I forgot... only people on zerohedge buy gold. NOBODY else has been. That's the argument of so many here why gold is not in a bubble.
They should pass me some of that dope.
Johnny dear, you seem stressed.
Can I rub your feet?
Dude! Are you a chick?
Noooooo! Noooooooo! Hulky... wrong question...
"are you a hot chick?"
Bravo is ok, he has a brain... I hate to admit this but he seems like me when I first got here... Pissed, and rightly so.
I am no longer the angry new guy, I am here to learn and help others if I can... and Blow up every once in a while..
Hulky, you are a great sport by the way... Nice of you to step in the other day and try to smack some sense / calm into me...
I think, or I know (I will speak for myself only) that I forgot that almost all of us here are in the same boat... going the same fucked up direction and all yelling (new people mostly, including myself, foo shoo!) about whatever, but we all should be mad. Picking on each other. Not the brightest thing I have ever done and not so proud of it. But I am man and I can honestly say I am not perfect and that I pray for all people everywhere every day.
But back to the important question, is she hot?
My best to you and yours Hulk, JW
Bravo does have a brain, just no wealth to protect and that makes a difference...
We are all in the same boat and the bilge pumps just failed!
Good luck to all
Buried canned ham Biatchies!
No, a guy.
But don't you find the trolls just so sexy?!
An attempt at humour akak...
Personally, I don't find the trolls attractive, but you keep wailing away!
Mr. Rosenberg just dropped his credibility several notches with me for quoting that asshat Jon Nadler. Why does ANYONE give that terminally-incorrect, gold-hating fool any consideration or space to vent his pro-bankster bile? He is nothing but the laughingstock of the gold world, and I know not one intelligent, non-Keynesian commentator or reader of his daily Kitco anti-gold bilge who defends or supports that man in his malicious disinformational campaign against gold.
The real $64,000 question, raised innumerable times, is why does Brad Kitner of Kitco employ this man to denigrate his putative stock in trade, and belittle and attack his would-be customers? Although lately I notice that Nadler is transmongrifying from a gold-basher into a rhodium pimp ("held securely for you in Kitco's own vaults!"), so maybe he is finally giving up on his gold-hating ways?
+11111!!
perfect....
rage deactivated...
p.s. - the author of this article is a fool....
The authors of the two comments above mine are fools.
I do believe that your post constitutes what is colloquially known as "flaming", something which is typically the purview of those who are commonly identified online as "trolls".
Just thought you might like to know that.
Have a nice day!
Are you and Rocky Raccoon one in the same? you are mono thematic with your troll bs, do you talk about mom's and deal gold too?
You are the troll pal.
I think you're hot!
the only thing that worries me for pm prices in the short term is the hysterical reaction of some posters here to anyone or anything suggesting an alternative to ever increasing price levels. Usually a sign of a "weak holder".
I suggest that those people are likely to get blown away despite their protestations of "loyalty" to gold & silver and their putative arsenals of deadly weapons with which to defend them.
A good shake-out would be healthy for the market in that those weak holders are forced out, because I would rather not share a future world in which they would form a semi-literate "elite".
And "semi-literate" is a compliment, when I consider some of the extremely embarrassing and downright crude rubbish that I have read recently on ZH.
M~~~~~,
It's merely a sign of this significance:
When did you get in, what is your average price of your holdings???
If most of your gold was purchased at $400 or $600, you care not whether it settles at $800.
If you are a Johnny-come-lately and jumped on the bandwagon at $1200., well then, you have some serious need for pause and reflection.
You will be Junked by the Freaks for using Historical Data, Your Brain and dare I say Logic!
The Gold Bugs feed or try to feed everyone else, FEAR!
So in the spirit, BOO! did I scare ya into buying anything... Nope? Well try, try again?
Be well and keep your chin up as you will be a target any time you go against the Gold Bugs!
Sincerely, JW
Maddeafandblind,
Is it just me or when people are jumping up and down screaming rally.... isn't there supposed to be some UPWARD! Movement?
How about just a lil bit of UPWARD! Movement?
No UPWARD! Movement and in fact DOWNWARD! Movement is not a rally! Well, unless you are a Gold Bug!
I read... "Stupid is, as Stupid Does!"
Hurry... Limited time only!!!
Buy into the Gold Bubble...
But hurry! Before prices dip any lower!
Don't be left out!
Don't be one of those who Bought Low to sell High!!!
The End is Near... We are waiting on your call... 1 (800) You-Idiot or 1 (800) Gold-Bug
Republicans, Evangelicals and Sheepeople get here fast!
Before...
The Uni-Bombers, Rapture Crowd and / or other idiots steals your top spot!
Remember Gold will not be at all time highs forever! Hurry and buy at the top!
For a limited time only we will offer You! For! Free!!! a “How to scare your friends and family into buying Physical Gold!” kit, as taught by an out of work used car salesman! A $5.00 value for free!!!
Remember that the End is Near!
Don’t get caught Buying Low to sell High!!!
Ignore the 30 year charts at all costs? http://goldprice.org/30-year-gold-price-history.html
Is it just me or when people are jumping up and down screaming rally.... isn't there supposed to be some UPWARD! Movement?
Hi JW n FL,
Not necessarily, but thankyou for your question.
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Nice!!!
Where do you park your gains?