17 May 2012

Why Gold Behave Differently this Round? (May 2012)

When market sentiment was bearish, equities market would slump, just like what we seen for past few days. Global markets suffered yet another blow due to the uncertainties surrounding EU, where Greece may potentially exit European Union. Would Greece finally exit EU? This is an interesting yet important questions for investors.

The headlines have been on the EU crisis recently, overshadowing the highly speculated Malaysia general election's date. Well, now would be a tough time for our Prime Minister to call on an election amid the gloomy global outlook. Maybe, the best time to hold an election already gone!!!

Anyway, another interesting issue was the slump in Gold prices. Curiously, many investors questioning the different trend for gold prices. Normally, it will spike up along with the risk level of global equities market, together with USD. Theoretically, gold and USD would over-perform other asset classes during bad times. Yes, USD had already appreciated against a basket of currencies for a record 12 straight days. However, bullion erased its 2012 gains this week while investors are reducing gold holdings for a 3rd month, the longest stretch since 2004.

So, which is the Safe Heaven now?

Based on that fact, it seems like USD is the only safe heaven asset class that investors trusted now. Frankly speaking, Finance Malaysia don't know why gold behave differently this round. Anyway, we came out with the following potential explanations:

  1. Actually, we really don't know how to value gold. Is it expensive or cheap? There is no benchmark on gold prices. Because of that, gold price tends to be speculative in nature. Currently, hedge funds are the least bullish on metal since December 2008, and they are the one who drove up gold prices. Is this the time for them to take-profit?

  2. While there is no benchmark for gold, the strength of USD was based on US economy. We can't deny that US is recovering now, amid at a slow pace. Also, without QE3, why USD should stay low? With that reason, investors might chose USD than gold, as the potential is greater.

  3. Please don't forget that many European governments had the greatest gold holdings in the world. For sure, ECB needs to pump in more liquidity into market. Where does the money comes from? When you're holding many gold and you need money, what would you do? Of course, cash in by selling your golds.

Even said so, many analysts are predicting a rebound for bullion. While RBS, ABN Amro and Barclays cut their gold forecast in May, Goldman expects prices to rise by 25% to $1,940 an ounce in 12 months. Billionaire investors, George Soros is favoring gold and he may gave gold investors the confidence. Good Luck.

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