Really don’t want to sound a financial commentator but though would take the liberty of sharing a couple of thoughts on the occurrences in the financial markets and its potential ramifications!
The dream run that gold has been having the last 12 months as a “safe haven” investment has suddenly run into rough terrain and has lost over 7% in the last one month and nearly 13% from its peak a couple of months back.
Couple of aspects have to be considered in the context. In an uncanny coincidence in terms of timing, George Soros, the famous hedge fund manager, had made an observation of the gold being the ultimate bubble. George Soros is the person who, in 1992, is credited to have “broken the back” of the Bank of England and the British Pound. It is no wonder that market took him a little too seriously and gold started dropping steeply even within a couple of days of his statement.
The other aspect is the prospect of the significant unwinding of the “Carry Trade” based on US Dollar. Soros was stated to have said - “When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold.” The strengthening of the US Dollar or more appropriately the weakening of the Euro has also contributed to the significant drop in gold prices.
The drop in gold prices of the magnitude last week, i.e. US $ 60 an ounce has to be viewed with caution. The last time drop of this magnitude happened was in July / August 2008 and we immediately saw the unfolding of the financial crisis across the world with the start of the bankruptcy of Lehman Brothers and AIG! The continuous drop in the stock market should also be a cause for concern.
The next couple of weeks is going to be a cause for concern in the international markets. The recovery of 2009 may again be tested again. There are already talks of the “w” shaped recovery! That would mean we could see a drop before a complete recovery. Euro is going to be tested quite a bit. The problems in Greece, Spain and Italy is not going to help Euro either. The strengthening of the dollar is not going to help the economy either.
Gold would possibly see some more corrections but would have to go up considering the increasing uncertainties. Short term it would be possible to see some pull back before the Chinese New Year as that period would see increased level of retail buying in the Chinese markets
Sunday, February 7, 2010
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