This third week of September has been nothing short of tumultuous. Gold prices have taken a huge beating.
On the face of it, the decline in gold prices appears to make little sense. It’s not as if the economic outlook in North America or Europe is getting any better. Greece is in a mess, several European banks are teetering on the edge, and in the US, they’re facing another deadline in Congress at the end of this month.
In other words, the global economic outlook is no better than it was a few weeks ago.
So why the big downswing in gold prices?
Ask any group of investors, and you’ll likely get as many different opinions.
But here are a couple of factors that seem to be influencing gold prices lately.
First, the US dollar has been rising against other currencies. No, there is no reason for the dollar to suddenly become strong. But when you look at it relative to other world currencies, particularly those in Europe, it looks like the best of a bad bunch.
It’s all relative. When other currencies get into trouble, the more the dollar looks safe again. And when positive sentiment drives the dollar up, some investors will sell some gold to buy more dollars.
The second factor in gold price changes can be found with hedge funds, and their managers.
Not so long ago, gold prices were influenced primarily through buying or selling by central banks, the jewelry industry, and private investors.
More recently hedge fund managers have been buying gold. And over the last year or two, they have been buying a great deal of gold. And they have been buying for the same reasons we have…using gold as a safe haven.
However, over the last week or so it appears that fund managers have been selling gold by the ton.
Why? Some have likely been taking profits, after 18 months of amazing growth. They have made their money and are now ready to sell their gold and take the cash.
Others are perhaps selling because they have to cover losses in their stock and bond positions.
And perhaps others are simply getting their books ready for the end of the quarter, and want to see some big numbers in the profits column.
Whatever their reasons, there is a lesson to be learned here by those of us in the small, private investor camp. In short, gold is no longer a low-volatility investment. There are some bigger players in the game now, and they buy and sell a great deal of gold.
This means we can expect to see a new level of volatility in gold prices, and a whole lot of second-guessing when prices rise and fall.
But have the fundamental reasons to buy and own gold changed? I don’t think so. The world economy is still a mess, and looks likely to get worse before it gets better. Gold is still a safe haven, which is why fund managers have entered the market.
Long term, is still seems likely that gold prices will continue to rise and break new records. But be prepared to experience a lot more volatility along the way.
Also, keep in mind that volatility has a silver lining. If you believe the long-term trend is still upwards, then you can use these steep corrections as an opportunity to buy more gold, before the price trends back up.
Further reading…