Why not to position for a gold crash
GOLD has traded in a channel for the last month, but despite this, it remains at a price nigh on unimaginable 18 months ago. “Although the last month has been a quiet one for the price of gold, the metal is still up by around 10 per cent for the year and is still almost $200 below the all-time highs set in September last year,” says David Jones, chief market strategist for IG Index. He adds that, whenever gold is talked about there is always vociferous opinion among some that it is a bubble and all bubbles burst. “This is a fair point – but it has also been a regular argument for at least the last three years and since then gold has doubled.”
Indeed, some have pointed to 1980 for an example of what happens when gold crumbles and hope to profit when the same happens this time. But the current situation is drastically different. The 1980 high of $860 was driven by runaway inflation hitting 14 per cent and investors buying gold as a store of value and to protect their wealth. At the same time, equities were at the beginning of the biggest bull run of a lifetime.
Now, gold’s attraction is largely its safe haven status. With haven currencies overheating and debt timebombs ticking in the majority of developed countries, gold is seen as a safe place to put your money.
The bottom fell out of the gold run when Fed chairman Paul Volcker aggressively hiked interest rates to try and curb inflation, in doing so removing the main reasons to hold gold. According to David Morrison, market strategist at GFT, Ben Bernanke couldn’t raise rates even if he wanted to, and inflation looks likely to stay ahead of base rates for the foreseeable future. “With central banks in the developed world printing money, gold will remain supported and physical demand is strong – central banks are now net buyers of gold for the first time in over 20 years,” says Morrison. This doesn’t mean that gold will be stable – we should expect volatility in the price as investors trade in and out of leveraged positions – but anybody hoping to profit from a gold crash are going to be disappointed.