Over the last few days we noticed a pattern in the up to date market. The price of commodities in the recent week has plummeted at record amounts. Oil dropped 8% in 2 days Silver fell 16%, most in 17 months. The market is in a period of growth but how long will it be sustained? The market picked up points in the Dow and S&P the last few days but that was all erased on Monday 4/15. we decided to take a in depth look at gold. The major fall was gold with a 13% dive, most in 30 years, all of which happened the day before the Dow Jones reached an all-time record high. Dow fell almost 1.8% to erase the entire gain of the last week.
Here is a chart of the Dow Jones last few days:
Gold is most in demand for Jewelry and Investment but also used in the technology and medical fields for conductors and radiation resistor. because the Dow and S&P have been doing well gold is moving opposite because investors are bullish on the market. Gold out-performed the S&P 9 of the last 12 years. During times of crisis investors tend to move to Gold.
Why is this? What this means is that as the dollar moves in a direction, gold price tends to move opposite. The gold price tends to have an inverse correlation to USd ($). This makes gold a good investment to diversify a portfolio. This supports the reason investors are turning to market stocks rather than investing in gold. Monetary policy before the housing crisis allowed gold to move closer with the market, and even in the first few weeks of the recession. After the policy was changed in the fall of 2008 gold price skyrocketed to near 1900$/oz. by 2011.
Since gold hit it’s high in September of 2011, the price has traded between the $1800 and $1500 range, but on Monday April 15th, after losing market traction on the previous Friday, the price of gold took its largest fall in over 30 years. Some have said that the gold bubble has finally popped, but why now?
Cyprus reported that it was going to sell large portions of its gold reserves to pay off outstanding debt. This was done by Cyprus to meet bailout conditions set by the EU. Other contributing causes were worse than expected economic data coming out of China (China being the largest purchaser of gold bullion, aka. huge source of gold demand), the rising US dollar, low domestic inflation, and rising market confidence in equities. All of these together, matched with positive sentiment on global economic/business growth led to gold largest single-day decline in over 3 decades.
But what does this mean and who does it affect? Well, Those largest negatively affected are the governments who own large reserves in gold, gold mining/processing companies, and people/funds that were heavily invested in gold. Although this most certainly seems like bad news, India is having a field day while it’s people flock to gold dispensaries to stock up while prices are low. India is the world’s largest commercial consumer of gold, which means boosts in demand for commercial items like jewelry. Worldwide demand for jewelry is likely to increase and create large profit margins for businesses.
So, where does the price of gold go from here? Given the nature of the large and sudden drop, it would make sense for a brief rally on gold. Investors will question whether the large drop is technically/fundamentally justified and markets may drive the price back up to test the waters. Many investors have been scared out of gold (supported by massive volumes on Monday) and it may take some time for investors to reclaim their confidence in the precious metal. In the long run, if global economic conditions remain stable and if equities continue to provide more attractive returns for investors, the price of gold will continue to fall. Only the markets will decide where to go from here.
