Native Floridian
Bronze Member
- Mar 12, 2012
- 1,211
- 486
- Detector(s) used
- Excal, Sov GT
- Primary Interest:
- Beach & Shallow Water Hunting
Around the net I've been seeing questions about the price of Gold. Mostly they are asking why is it down? So, for those of you who are wondering why, this thread is for you.
Ok, what's up with Gold? Prices have been down more or less, since the beginning of May, and are negative year to date. With all the uncertainty in the world what's up?
I'll hit on some of the basics.
Gold is considered a safe haven. in times of uncertainty Gold prices usually rise. However, in times of sovereign uncertainty, like now, Gold isn't always the safe haven of choice. Right now, U. S. Treasuries are the safe haven of choice. In rough numbers the 10 year treasury has moved 80 basis points over the last three months. When the price of treasuries moves up the yield moves down. We are having a huge rally in U.S. Treasuries right now. BTW, this is called risk off. That is, no one wants to take a risk right now, so invest in safe guaranteed paper. Take risk off the table.
The thing about a risk off flight to treasuries is while it's a win for bonds, it also creates losers. U.S. Treasuries can be bought with dollars only. The demand for treasuries being international means that foreign buyers have to convert their currency to dollars. Doing so causes an uptick in the price of the dollar relative to other world currencies. This uptick causes other dollar denominated securities to move down in price.
Here's where it gets interesting for holders of Gold. Gold, also can only be purchased with dollars. Foreign buyers, ie much of the demand, must convert their currency to dollars to complete a gold transaction. This is problematic. When there is a spike in the price of the dollar it means buying Gold with inflated dollars. In addition to making the purchase more expensive it throws a wrench in the works as it adds a layer of currency exchange risk to the equation. Foreign buyers of Gold could have a win in the metal wiped out by a loss in the currency. Or they could lose on both. For this reason Gold is a pass right now in the risk off environment. In a risk on environment, dollar low, metal low, it's a big time buy! Americans don't have exchange risk but are affected by the international demand or lack of it.
Why isn't Gold the safe haven of choice right now? To much uncertainty regarding the Euro and what sovereign nations might do in a fire sale. Betterto hide out in treasuries. Low/no return is better than taking a whack if the wheels fall off.
The stock market was Risk On thru march of this year and has been risk off since.
There is one more factor that affects not only the price of Gold but the price of most securities. That is job security. Most of the invested money in the world is controlled by institutional money managers. Being an institutional money manager is a really cool job. Not only do you control hundreds of billions of dollars, but you can move markets and most importantly to you, it pays big big bucks. Eight figure salaries and bonuses are the norm. So, it's a job you don't want to lose. So, how not to lose it? Don't go off the reservation being an original thinker!!! What that means is don't go against what your peer group is doing. Don't dare take a contrary stand!!! WHY? If you take a contrary stand and win, you are a hero. if you take a contrary stand and lose, you stand alone out of a job. Interestingly, even if you lost money for your firm, as long as everyone else in your peer group lost a like percentage, your job is safe!!!!! Being a lone wolf standing on a losing quarter and it all goes way. I tell you this to give you an understanding of the powerful market forces at work that can drive prices in one direction or the other. Right now, it's risk off, stay out of the water. For that reason most have reduced their exposure to Gold. That, in turn, has also driven the price down. And, if that's not confusing enough, it could change tomorrow.
Ok, what's up with Gold? Prices have been down more or less, since the beginning of May, and are negative year to date. With all the uncertainty in the world what's up?
I'll hit on some of the basics.
Gold is considered a safe haven. in times of uncertainty Gold prices usually rise. However, in times of sovereign uncertainty, like now, Gold isn't always the safe haven of choice. Right now, U. S. Treasuries are the safe haven of choice. In rough numbers the 10 year treasury has moved 80 basis points over the last three months. When the price of treasuries moves up the yield moves down. We are having a huge rally in U.S. Treasuries right now. BTW, this is called risk off. That is, no one wants to take a risk right now, so invest in safe guaranteed paper. Take risk off the table.
The thing about a risk off flight to treasuries is while it's a win for bonds, it also creates losers. U.S. Treasuries can be bought with dollars only. The demand for treasuries being international means that foreign buyers have to convert their currency to dollars. Doing so causes an uptick in the price of the dollar relative to other world currencies. This uptick causes other dollar denominated securities to move down in price.
Here's where it gets interesting for holders of Gold. Gold, also can only be purchased with dollars. Foreign buyers, ie much of the demand, must convert their currency to dollars to complete a gold transaction. This is problematic. When there is a spike in the price of the dollar it means buying Gold with inflated dollars. In addition to making the purchase more expensive it throws a wrench in the works as it adds a layer of currency exchange risk to the equation. Foreign buyers of Gold could have a win in the metal wiped out by a loss in the currency. Or they could lose on both. For this reason Gold is a pass right now in the risk off environment. In a risk on environment, dollar low, metal low, it's a big time buy! Americans don't have exchange risk but are affected by the international demand or lack of it.
Why isn't Gold the safe haven of choice right now? To much uncertainty regarding the Euro and what sovereign nations might do in a fire sale. Betterto hide out in treasuries. Low/no return is better than taking a whack if the wheels fall off.
The stock market was Risk On thru march of this year and has been risk off since.
There is one more factor that affects not only the price of Gold but the price of most securities. That is job security. Most of the invested money in the world is controlled by institutional money managers. Being an institutional money manager is a really cool job. Not only do you control hundreds of billions of dollars, but you can move markets and most importantly to you, it pays big big bucks. Eight figure salaries and bonuses are the norm. So, it's a job you don't want to lose. So, how not to lose it? Don't go off the reservation being an original thinker!!! What that means is don't go against what your peer group is doing. Don't dare take a contrary stand!!! WHY? If you take a contrary stand and win, you are a hero. if you take a contrary stand and lose, you stand alone out of a job. Interestingly, even if you lost money for your firm, as long as everyone else in your peer group lost a like percentage, your job is safe!!!!! Being a lone wolf standing on a losing quarter and it all goes way. I tell you this to give you an understanding of the powerful market forces at work that can drive prices in one direction or the other. Right now, it's risk off, stay out of the water. For that reason most have reduced their exposure to Gold. That, in turn, has also driven the price down. And, if that's not confusing enough, it could change tomorrow.
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