Gold: Play the Shares, Not the Metal - Example

GOLD Gold, a precious metal has been taken as a store value since ages. Gold is also taken to be a complicated asset where few people refuse to accept it in the form of money. It is free market money (James Turk, March 2008) which is circulated by legal tender laws. It is generally accepted as a commodity in the ornament industry rather than an important element of the industrial growth and relevance, its monetary value which is the prime source of manipulations and speculation is completed overlooked. Its economic importance is well represented by the fact that the prices of the crude oil are measured in terms of gold to sustain a consistent and stable purchasing power for coming years. People have owned gold in various forms such as mutual funds or stocks in the mining company; it offers the advantage of diversifying portfolio risk to the investors. The demand and supply of gold in the current year, 2008 has wavered due to many reasons such as the stock of gold held, stock of the national currency, demand of gold in the market and demand of currency in the market. However, Due to the increasing factors such as inflationary conditions and the staggering market conditions, a global credit crunch in the market for the demand of Gold has been affected worldwide, for instance the dollar demand for gold had reached to almost US $20.9bn in the first quarter of the year, nearly double of the past four years of pricing. The steep rise in the gold prices, which touched $1,000/oz in mid march, was the main cause of fall in its demand since 1990’s. A drastic fall of 35% in the Net retail investment of gold and a decline of 21% in demand was observed in the jewellery segment in the year 2008. Other factors such as the unsteadiness in the equity share market, the flux in the dollar and mounting inflation have effected the demand fluctuations in the gold investments in the current year. The fall in the dollar price has severely affected the functioning of the global financial system resulting in 20% rise in the gold prices. The gold mining shares are stuck in the equity market resulting in the higher pricing of other commodities. The speculation has been triggered in gold buying who perceive the financing function as a major dilemma in the coming future trends. People who prefer risk aversion have opted to buy GDX and sell gold as investors hunt for the different ways to safeguard themselves from the rapidly aggravating inflationary conditions. Disposing and hoarding of gold plays a very crucial role in its pricing strategies, the huge amount of gold which was hoarded earlier, still has the capacity to be sold in the market at fair price. The quantity of hoarded gold in comparison to the real production of gold is affected by the various perception and emotional changes undertaken by the people at different circumstances. One of the main determinants of demand and supply in a market is the ‘Price’, but surprisingly the rising prices of gold did not affects its demand during the initial quarter of 2008 instead its supply graph went up 620 tones, which clearly indicated that the demand curve for gold’s price rose simultaneously with the rise in its demand. Demand for gold is also increasing because now people not only find it as a medium of investment, rather than saving also. Buying of gold coins, bars and other forms of gold investment serves to be a safe, secured and reliable source of storage of wealth and possession. It is been clearly revealed that the demand for national currency is declining while the demand for gold will continue to rise in the coming consecutive years (Miller. Z, 2007), as stated in the under mentioned chart: (James Turk, March 2008) As per the prediction the gold prices will further rise in future for another unmatched eight years. The South African mining companies are facing severe problems of rising prices of gold due to the shortage of power. The supply from the Western World Central Bank has been too sluggish, they intend too keep gold bullion as a reserve in regard to payment in times of utter crisis such as war or unexpected events, however countries such as in case of India, the demand for gold spurts up due to special occasions during months of wedding and festivals, Turkey, China and United Arab Emirates have also witnessed a sharp rise of more than 25% in gold sales in the current year.   On January 24th, 2008 The New York Times reported $900 mark per ounce price broke for the first time in the past years. In 2008, people have preferred to hoard gold for the uncertainties of the future, especially considering the U.S Dollar, and other unstable economies, gold has become the most popular idea of investing amongst fund investors. Gold has been one of the up trends since past five years, especially from 2006. (Kevin Kelly, 2008) The prediction for 2008 has shown a positive turn for the U.S economy. Two main sources of dealing with gold in 2008 is either mining of gold or investment in ETF an instrument of evading and mitigating risk or hedging, where each share represents 1 /10 of an ounce of gold priced by the London Bullion market association. The ETF Gold fund on New York Stock Exchange( Panzner. M, 2008), sponsored by the World Gold Council, falls under the Street TRACKS Gold shares which is the US first trading fund used for the tracking of the gold price. It is a beneficial option for both the investors, institutional and individual who want to play safe, by mitigating the risk factor against the rising inflationary conditions in future, effects of diversification and fluctuations in the currency exchange rates. Exchange of currency affects the purchasing power of the gold in terms of the price changes of the other commodities and services, that is why at times of need or imbalance in the market situation the purchasing power of gold becomes deeper. In 2008, gold price instability has affected the recent up in oil prices to a very large extent. In 2008 e-gold holds a strong position and is making several millions dollars of transaction each day. The Barrick Gold Corporation under the New York Stock Exchange offers a very high technical support; it’s a controllable bet on the price of gold. In 2008 Supply problems are expected to go sky high in the gold market worldwide resulting in a gold crunch. The troublesome circumstances in the Middle East and insalubrious relation between US and Iraq if hike up the tensions level in future such as the terrorist activities of bomb shelling and violence , such acts could affect the gold market all over the international market to a major extent , spiking up the gold prices between $975 to $1025, even the prices are tend to shoot up if the credit crisis worsen the economies and the central banks are strained to increase the liquidity flow in the financial structure more than what is expected. But there can be an alteration in the gold prices during the mid months of the year if the above mentioned market conditions take a downturn otherwise critical and dangerous situations would have to be faced in 2008 as well coming years. Moreover, in 2007 The Persian Gulf which was the major cause for price hike in oil market can continue to affect the prices of gold in future as well. Gold price factors are determined keeping in view a number of political and economic factors in mind. Weak and low US Dollar, changing in the attitude of people, high demand for jewellery, and increase in the demand for exchange traded security in terms of paper supported products. US dollar is the key factor for gold, as the dollar goes up in value, gold goes down and vice- versa. It has a high inverse or opposite correlation with the dollar. Gold as a main channel for the portfolio item has a very important role to play in the market development in coming months. At the end it can be said that the demand versus the supply affects the price of a precious commodity like Gold, if the supply is high and the demand is low, the prices deteriorate and vice-versa. In the current market scenario the value of gold traded is much more than value of gold in use and stored as a reserve. Gold ix expected to hit $ 1,100 ounce in 2008(Frisby D, 2008). The credit crunch in US banks will still continue, huge inflationary conditions will prevail as the central Bank would increase liquidity, and the credit problems would persist as the banks tighten up lending and increase hoarding and speculation. The recessionary conditions in US would affect the Gold price to a large extent. G time would experience a genuine worldwide competition for the supply of gold. REFERENCES Chart 2: Kevin Kelly, Jan 3rd 2008, How to play gold in 2008, viewed on 4th June, 2008, http://www.bloggingstocks.com/2008/01/03/how-to-play-gold-in-2008/ BIBLIOGRAPHY 1. James Turk, March 2008, Truth is Treason in the Empire of Lies, An Overview of Gold’s Supply & Demand, viewed on 4th June, 2008, http://freethemarketman.wordpress.com/2008/03/06/an-overview-of-golds-supply-demand/ 2. Michael Panzner, Mar 18th 2008, Gold: play the shares, not the metal? Viewed on 4th June, 2008, http://www.bloggingstocks.com/2008/03/18/gold-play-the-shares-not-the-metal/ 3. Michael_J_Kosares, Dec 2007, Gold Forecast 2008, The Market Oracle, Viewed on 4th June, 2008, http://www.marketoracle.co.uk/Article3196.html 4. Zack Miller, Dec 28th 2007, Analysts: Gold is gold for 2008, http://www.bloggingstocks.com/2007/12/28/analysts-gold-is-gold-for-2008/ 5. Frisby D, Jan, 2008, How high could gold go in 2008? Viewed on 4th June, 2008, http://www.moneyweek.com/file/40158/how-high-could-gold-go-in-2008.html Read More