Bullish nature of Gold

-Suraj Neupane, June 2013

Chemistry is not always boring, when it comes to Aqua Regia (HNO3+3 HCl); why? Throughout, my higher secondary I never enjoyed the lesson more than when our chemistry teacher made a complex mixture of two strong acids which can dissolve the gold.

Those memories strike me recently when the market had a bearish attitude on gold. Nevertheless, the similarity of these two natures of gold both in chemistry and market, to surprise, fascinate the audience.

This glittering metal is so stable in terms of value since the money evolved it is always used to reserve centrally for each currency issued by a state.

Then what went wrong? Why did gold crash so deep? Will it bounce back to USD 1800 once again soon? This is what the common folks are seeking answer for. But wait, where are those pundits who soon behind forecasted for gold going as high as 10000 USD.

So what really happened goes behind to 2007, when gold market skyrocketed crossing the entire limit till the end of 2012. By 2007, housing market of US was about to burst and there were clear pictures of crisis ahead. Wall Street was in trouble, investor were in a panic on betting stock. A large proportion of investor started looking for a safe haven, and they ended up with few options.

Among those options there was a glittering metal; gold, sitting around with the tag of “safe haven “. This behavior of investors to add auric in their portfolio drive the gold price initially.

Then came 2008; Lehman Brother, player of Wall Street, investment bank; went bankrupt. Those masters of universe in Manhattan were losing their grip from the financial market and institution was hemorrhaging money. The option was either to go merger or write-down their balance sheet. Treasury was forced to pump billions and billions of dollars in the market. That didn’t make the market calm. Millions of jobs were lost. Soon the driver seat was fulfilled by the economist Bin Bernanke, in Federal Reserve; which slashed the enter banking lending rated equivalent of zero. This made money so cheap to the banker they literally started making record profit since their  worst time of just two quarter behind.

Eventually, this cheap money grows fear among the economist that Bernanke is welcoming the great depression by printing as much money as possible. And the consequences will be the higher inflation. So, how does market counterbalance the inflation? Yeah! That is true gold should be valued more, so it did rise.

If you are thinking these factors is the most influential factor for rise of gold than you are wrong, why? Because gold is more mysterious in market compared to chemistry lab.

There is a nation with average GDP growth rate of more than 7% for last 10 years. It is India; very few believe that India is the world biggest consumer of gold. This metal has been playing a significant role with attachment of traditions and Hindu religion. Last decade India was second nation after China who pulled the highest number of its population from slum to the middle class. This middle class had an appetite of gold as not just the traditional values but equally as investment for future. This factor was on count for driving gold so high.

Wait, what if a country increase its gold reserve? Will the demand surpass the supply and price hike? Yes, it does. BRICS nations have aggressively increased the stock of their treasury with the gold in past year.

The trade surplus of China along is so high that it is sitting on foreign currency pile of more than a trillion dollar. China wants its portfolio to be diverse and more independent rather than just depending on USD. So, it doubtfully gave signal of helping hand toward Europe at the time of crisis by buying ECB bond. This fuelled a speculation among the investor that Gold would be next target of Chinese surplus money. Later it was proven.

These were the main factor pulling gold for the bull case during the time of crisis till late 2012.

Whatever, the reason was, gold really didn’t make the landmark of 2000 USD however it was overwhelmed with the historic points of 1800 USD.

But, it fell so bad like it was inside trading. Why did it happen so fast with a mysterious way?

The reason is simple, housing market in US is recovering, and investors have gained confidence in market which increased market liquidity. More of all, the recovery is on the way signaling increase in non-farm payroll; so the gold stopped rising further.

Why it fell?  It is just as simple as it is. It is all about the guy on the driving seat Mr. Bernanke. Actually this time the genius economists prove that he really can drive it better. He has printed as much money as he wants. He kept interest rate so low for so long. But he never let the inflation go out of his control. Now he plans to increase interest rate.

Now there was fear that gold needs a correction with the adjustment of inflation, demand and supply. So it fell.

Suddenly, India imposes an import tax on gold which was more than 20%. It further fell.

Recently Cyprus got cramped with its exposure of Greece market and has chosen to sell some gold. So supply side eventually exceeded. This time gold really slammed the rock bottom and it bounced for a while.

In conclusion, gold is very stable and good for a passive investor in a long run. The Hindu symbol of prosperity and wealth has never let us down since its existence as precious metal. It is still above the average.

On the other hand, I start finding market character of gold similar to chemistry lab because both need to be fueled with catalyst for change in its property.

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