Drop in value of gold
The relevance of this question is prevalent in the recent fall in value of gold has endured over the last 5 weeks.
“The resurgence of risk appetite over the past month has seen investors sell gold, and position themselves for ‘the worst is over’ scenarios.” This approach may prove to be a little short sighted.
However the smart money should be the only trend to follow. Gold’s lower buying price has prompted a buying frenzy in China, Brazil and India. The recent fall in the gold price has attracted Central Banks around the world to use its current value as a buying opportunity, prompting a gradual rebound in gold positions.
So why on earth aren’t everyone and anyone previously interested in gold using the current price as a bargain buy? The answer is a psychological one. It might seem strange but the cohorts of the market who are new to this area tend to buy when the market is at its highest. In August 2011 – gold was at an all-time high and this prompted a surge in demand from 1st time buyers and less demand from institutions and central banks. In 2013 – the price has come down and the trend has reversed itself.
Central bank demand for gold
The factors that countries are taking into account when deciding to take additional protection and to use gold’s price as a buying opportunity:
• The UK has just been stripped of its AAA credit rating
• High and rising inflation leaves the UK market with less purchasing power
• PWC has indicated more businesses like HMV, Jessops and Blockbuster to fall into difficulties
• The US economy unexpectedly took its biggest plunge in more than three years last quarter, indicating a new level of vulnerability for the economy
• The US is committing more money to the money supply through increased stimulus measures
• The Bank of England is being pressured to follow suit and kick start a fresh QE programme
Commentators have referred to the recent stock market rise as nothing more than a “W shaped recovery” with strong expectations that a correction is looming. If they are right and if the financial Status-Quo continues – market participants that don’t snap up this buying opportunity may well regret not acting sooner.