Fundamentals remain for gold to resume its bull run
With the US balance sheet more than doubling, it is not gold and other commodities that are expensive but cash that is cheap
GOLD has been struggling to make any real breakthroughs of late, stuck below the psychological $1,700 an ounce level since the beginning of March. On the New York Mercentile Exchange, Comex gold futures’ open interest, a liquidity gauge based on the number of contracts outstanding, saw some of its lowest levels of 2012 – spot gold fell 1.05 per cent over the week.
But while gold is struggling to gain any upside in the short term, the fundamental drivers of a bull market that has lasted more than 10 years remain. Monetary debasement, and financial and political instability have pushed an investor flight to safety and an easing of purchasing restrictions has made gold as a retail investment product more accessible than ever.
The Eurozone problem has been one of the biggest sources of this instability and the union as a whole is a long way off finding a meaningful, long-term solution to the fundamental flaws within its single currency system. The union-wide nature of this problem was brought home yesterday when Dutch Prime Minister Mark Rutte and his cabinet resigned after failing to reach agreement on reducing the country’s budget to meet European guidelines.
BURSTING THE BUBBLE
Gold has risen by 17 per cent compound year-on-year over the last 12 years, equivalent to about 650 per cent over the course of the gold bull run. But while many talk about a speculative gold bubble, Ross Norman, chief executive of Sharps Pixley, points out that we are seeing a bubble, but not in gold. With the US balance sheet more than doubling, it is not gold and other commodities that are expensive, but cash that is cheap. And the cult of monetary expansion is yet still going strong at the Federal Reserve and Threadneedle Street. Norman predicts that, should the Federal Reserve follow its plans to hold interest rates until at least the end of 2014, then $3,500 an ounce is not beyond the realms of possibility by 2016.
On top of this, central banks continue to be net buyers of gold, something seen in 2011 for the first time in 20 years. According to Adrian Ash, head of research for BullionVault, central bank purchases have slowed from the frantic buying of last year on the back of a sharp downturn in global FX reserves growth. But the central banks nevertheless remain in the market for the yellow metal.
So what does this mean for spread betters? Though the gold bull market could be seen as an investment story, Stuart Wheeler, the founder of IG Index and the grandfather of spread betting, developed the system to access the gold markets. It is important to remember that spread betting is not just about sitting in front of a screen all day, buying and selling dozens of times a day. Spread betters can run a strategy for weeks or months, often with both a long and short term trading strategy. And though gold is in a short-term correction, by having both a short and long term outlook to your gold trades, you can benefit from the almost inevitable monetary expansion and market volatility that could reignite the gold bull run.