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Gold Stock News From the Day of August 16, 2009
How the Gold Price Shapes Investment
For one to say that global financial markets have had an interesting ride this year is to put things mildly. The first two months of the year saw fear and high volatility dominate, with heightened concerns of the stability of the banking system and calls for a second Great Depression. The past five and a half months have seen quite the opposite, as massive government stimulus has led investors to seek out risky assets behind the premise of economic recovery and a resumption of global growth. Overall this trend can be characterized as a risk aversion trade early in 2009, followed by the risk seeking trade.
While most assets classes, such as equities, credit, currencies, and resource-based commodities have tracked the overall risk aversion versus risk seeking trade well, the gold price has primarily moved to the beat of its own tune. Gold began the year strong, peaked before the risk aversion trade did, sold off in March and April, rallied back along with risky assets in May, and has traded in a more narrow range over the past couple months.
This idea of creating its own path seems to fit with gold, as it is the one asset class that serves as both a commodity and form of currency. Gold has been viewed throughout history as a safe haven investment and a store of wealth during difficult economic times. In general gold also has an inverse relationship with the US dollar, and that is the currency in which it is denominated.
The gold price also tends to be a polarizing investment topic, as it attracts a large group of loyal supporters as well as those who love to criticize the yellow metal. Gold price loyalists frequently point to the money printing efforts of central banks and the use of gold as money throughout history, while gold detractors claim the metal serves little practical purpose and has little real value. The fact though that the gold price is traded in a global financial market and a considerable number of people purchase it for investment purposes lends credence to the view that gold is at least an important asset class which deserves serious consideration.
Going forward the gold price appears to have many factors working in its favor. Recently the gold price has given up some of its gains from earlier this year, but it remains above the crucial $930 level and has not broken its long term trend line. This price action has been coupled with a growing bearish sentiment (based on the NDR Crowd Sentiment Poll), the highest since late 2008 when gold was well below $900. Furthermore, August and September are historically the most positive for the gold price, and the back half of the calendar year is also consistently more bullish than the first half. Finally, central banks have not indicated that global economies are in healthy enough shape for them to withdraw their easy money policies of currency debasement and low interest rates. The conditions are therefore set for a positive near term future for the gold price.