Very little hype in gold
Sentiment is important in the gold market as is other markets particularly stocks
Article ignores the large body of research showing gold is safe haven asset
Gold may struggle to breach $1,300 in short term
Trading gold and short term speculation is high risk and for professionals
Important for investors to focus on long term fundamentals which remain sound
Cycle of Emotions Hope Phase Now (GoldCore)
Earlier this week Shelley Goldberg , commodities strategist for Roubini Global Economics wrote about how gold was set to disappoint the ‘gold bulls again.’ Goldberg argued that we should ‘throw out all the fancy analysis and realize that gold is an emotional trade.’
Aside from yesterday’s little hiccup following the Fed announcement, the gold price has had a great year. Goldberg agrees, ‘After breaking through a six-year downtrend line, gold rose last week to its highest level since Nov. 4, and is up an impressive 10.5 percent this year.’
Despite this performance Goldberg argues that we shouldn’t ‘believe the hype’ when it comes to gold. The hype she is referring to seems to be made up of the various op-eds and analysis that argue $1,300/oz is a key barrier for the metal to break through in order to set off on a bull run.
A very straightforward presentation of the ‘number of reasons why gold is in demand’ makes up the bulk of Goldberg’s article, yet she concludes ‘with so many valid reasons for gold to rally further, why am I a doubter? The most rudimentary reason is that gold is also an emotional trade and $1,300 is a round number. One need not be a superstar technical analyst. Just consider that for both psychological and systematic reasons, traders and algorithms like to sell on landmark numbers that also serve as a testing ground for a rally’s sustainability.’
Is the evidence that traders like to trade off ‘landmark numbers’ but analysis says it should go higher evidence that there is ‘hype’? We disagree. Rather we argue that not only is there relatively little hype in the gold market but that it is significantly outshone by all the reasons Goldberg gives herself, for why gold demand is up.
Where is the hype?
A brief google search of ‘$1,300 gold’ and my own daily experience of reading gold commentary does not bring me to the conclusion that there is hype. Gold has had a great year, but it has also surprised and disappointed many of us for the last couple of years. We are all aware that $1,300 is the next significant level, but most think that it needs to go higher than this in order to get any significant momentum.
This is something most seem relatively balanced about. There is a huge amount going on both politically and economically at the moment. As we often conclude so many of these commentaries, there is uncertainty everywhere and that includes gold’s performance.
We are not even seeing any ‘hype’ when it comes to physical gold buying. Gold demand is down in the US and we are not in any religious periods that mean manic gold buying as we often see during wedding season in India or New Year in China.
The focus on $1,300 reduces the argument for gold down to one thing people only care about gold because of the price. This isn’t true, partly because of the six very comprehensive and real reasons Goldberg herself gives to the bullish argument to own gold but also thanks to academic evidence, history and sentiment.
Why is gold demand up?
Goldberg offers six reasons for gold’s popularity at present:
- Role as an inflation hedge
- US Dollar performance
- Interest rates
- Only commodity showing strength
- Concerns over overvalued sectors
- Geopolitical risks pushing safe haven demand
These are all very significant reasons for gold’s performance of late. What we tend to see in mainstream commentary regarding gold is the suggestion that when one of these issues begins to ‘improve’ then gold will begin to suffer. This is a very short-term perspective and one which is supported by traders and speculators. It does not take into account long term fundamentals, all of which these six listed factors feed into. The long term fundamentals are not just influenced by these factors but also history, gold’s performance in a portfolio and sentiment.
Does the price matter?
Of course the price matters, we all like to know what we can sell something for should we need to. But does it matter as much as Goldberg seems to think it does?
For much of the time you are holding gold, you should perhaps look at the price i