The gold market has seen some of its more volatile trading days recently. What does it mean for us as investors? Is it time to buy now?
A Safe Haven?
Gold is a safe haven that has few equals. It is a store of value, but you must pay a ‘cost of carry’ to own it and it doesn’t produce yield. Gold’s allure is derived from the belief that no matter what happens in the world it will retain value. Can we say the same for the Lira?
Consumer Demand for Gold
The insatiable demand for gold over the past decade was fed by the uncertainty that followed the global economic downturn. Since the economic collapse in 2007-2008, the price of gold has doubled in dollar terms. What we are seeing in the recent violent market drop is a realization that as bad as things got in 2007-08, they are now in the rear-view mirror. Gold Chart
Possibility of Fiat Collapse
Sure there are plenty of issues to be resolved, but the concern wasn’t Cyprus or Spain or deficit spending in 2008. I believe the real fear among every government and many investors was the possibility of a complete failure of fiat money on a global scale. Fiat money is a currency that is backed by the full faith of the government issuing it. The United States is rebounding from the recession and the equity market has joined in tandem. Dow Jones chart The dollar has remained steady.
The unknown and investing for yield
Many gold bugs cling to the decline of local currencies, deficit spending, ‘superficially’ low interest rates, and the great unknown as support for their holdings. The problem is, there is a cost to carry gold and there is 0% yield! So when things seem to ‘normalize’ it becomes expensive to hold. Gold doesn’t pay!
The unwind in gold will take some time as central governments and global investors alike adjust to the new normal.