Post By MetroChef
Jun 28, 2012, 01:24 PM
Gold price - Risk on- risk off
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.
Last edited by Native Floridian; Jun 28, 2012 at 05:20 PM.
Jun 28, 2012 01:24 PM
Jun 28, 2012, 07:59 PM
Well done !! and Thank you
Life is too short to sit on your butt..go find something !!!
Jun 29, 2012, 07:58 AM
Native Floridian, nice post but I disagree with a couple of points. The dollar is not being used by a few countries now, such as China, India, South Africa and a few more as they are starting their own currency for trading. My opinion why the gold and silver price is down is MANIPULATION nothing to do with the dollar. Why have those Countries choosen to get away from the dollar? MANIPULATION. Buy Physical Stay Away From Paper. Keep Stacking.
Jun 29, 2012, 10:32 AM
That we disagree, well that's what makes a market. Certainly, there can be many factors affecting the price of Gold. my post, as complicated as it may read to some, is really just the basics. The main point being the well established inverse relationship between the U. S. Dollar and Gold prices. While there may be some splinter markets, the recognised currency for gold purchase is the U. S. Dollar. That is what institutional managers are paying attention to. As posted, they move in lock step.
Originally Posted by Marchas45
Jun 29, 2012, 12:18 PM
Actually, gold is purchased in as many different currencies that currently exist. You can get gold prices quoted in almost every national currency on the planet. Someone who buys gold in India does not convert his local currency to dollars to buy gold, nor someone in Australia, China, Germany, etc. Currently there does exist such a procedure to convert a local currency into dollars to purchase crude oil, but that long held practice is starting to change as many countries are agreeing to trade oil in their respective local currencies, and even gold being suggested for such in an attempt to get around the proposed Iran oil embargo. The act of using currencies other than the dollar in foreign oil transactions will in time weaken the world supremacy of the dollar and most likely weaken world demand for it.
Originally Posted by Native Floridian
During this past 10 year bull market gold and the dollar moved in similar directions for short periods of time. Right now there does seem to be a strong inverse correlation between the dollar and gold, but its movements are not in a one to one ratio.
Jun 29, 2012, 02:07 PM
Some very smart folks have spent much time and effort trying to understand and predict commodity prices/values and still failed miserably because everything hinges on supply and demand.
Gold prices are possibly the most difficult to predict due to the extraordinary complexities in both supply and demand.
Something as simple as a fad (in fashion or investing) can rapidly alter prices. (imagine what would happen if bling was suddenly rejected by the hip hop crowd and rappers. The market would be flooded with 10 million ounces of gold teeth. inch thick chains and oversized pendants.)
Jun 30, 2012, 12:29 AM
Hey Jim, good points!!!Yeah, this gold thing is more complicated than it looks!! My post is directed at the audience here, which is mostly U.S. citizens. And, i'm trying to keep it basic. When they look at gold prices, the price they are seeing is USD COMEX pricing. While there are commodity exchanges world wide, New York and Tokyo are the largest volume for futures trading. London wins for bullion trading and of course the differences in prices among these various exchanges makes for some interesting arb opportunities. Unfortunately, not for us little guys! Then again, that introduces currency exchange risk.
Volume is a huge driver of price. While i guess this could be argued, IMO, there is no way COMEX prices are being driven by what's happening in Calcutta. As well, the big players are only going to trade on the safest, and most established exchanges. That's the U. S. market.
Just to cover the base, the low hedge factor with gold also plays a role in pricing ( iknow someone is going to bring it up)
The post is also centered on the normal negative correlation between gold prices and the U.S. Dollar. The only times this relationship hasn't held is in times of massive uncertainty. Right now, is not one of those times. The U. S. is viewed as safe, even if some its banks are not. And, agree, the correlation is not one to one. I don't know that it ever is. Then again, it doesn't have to be. While the Euro zone scored some points this week, the worry over the wheels falling off in Europe has made the U.S. Dollar the safe haven of choice this time round. How to buy the dollar? Buy treasuries. The fallout has been a sell off and weakness in Gold. Again, good points! THX!
Lastly, 6/29 risk-on!! Gold up dollar weak.
Last edited by Native Floridian; Jun 30, 2012 at 06:53 AM.
Jun 30, 2012, 06:55 AM
That's funny!!!!!! I'd like it better if they'd just go to the beach and toss them!!!!
Originally Posted by PYRATE
Last edited by Native Floridian; Jun 30, 2012 at 02:46 PM.
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