Opening Position

November 2010

The 10-year bull market in gold just keeps going and going and going. After the Federal Reserve made a statement in September that it would be open to further monetary easing, the already bullish yellow metal took another leap into the stratosphere. Typically, accumulating gold is considered to be a hedge against inflation, and that comment from the Fed has sparked fears amid investors, sending them to park their money in gold. But more than individual investors, hedge funds have also been accumulating large positions in gold, and let us not forget the increased demand from China, both factors of which have also helped boost prices. Ever since gold broke above the $1,000 per ounce psychological benchmark, everyone seems to have caught gold fever.

As we all know too well, no rally lasts forever. On that thought, there is always one camp that says gold is in bubble territory that could burst very soon, while there’s another camp that thinks there is still room for gold to rise. As I write this heading toward the end of September, I have yet to see signs of investors showing much of any desire to sell the metal; in fact, quite the reverse. Another factor that has influenced the surge in gold prices has been the devaluation of currencies by central banks. Recently, intervention by the Bank of Japan weakened the yen. Similarly, the US dollar weakened after the Fed said it was willing to conduct another round of quantitative easing. And we all know that weakening currencies makes gold more attractive.

Regardless of the rise in the price of gold, we cannot forget that we are living in tough economic times. Debt is still a problem, and until we see a reduction in that debt we’re not going to see the optimism we need. While it is true that having a hard asset such as gold provides you with a modicum of safety, a surge in its price isn’t really going to do anything in terms of bringing financial stability or security to consumers. Gold doesn’t earn interest, pay dividends, or bring you any type of income. It isn’t going to return investor optimism. What we need to see is an economic recovery, and only then will we see a change in market dynamics. Let’s hope that all this quantitative easing brings about that change we need to see.


 Jayanthi Gopalakrishnan, Editor

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