Just when gold was edging close to the $2,000/ounce mark, the SNB surprised the markets with its decision to peg the euro to the Swiss franc at 1.2000. In reaction to this announcement, gold prices tumbled by 3.2% from an intraday high of $1,921.05/ounce to a low of $1,858.80/ounce.
One reason for this decline in gold prices is the precious metal's positive correlation to the Swiss franc. If you did well during the Sophomore year of the School of Pipsology, you'd remember that Switzerland is the only country that adheres to the gold standard and that 25% of its money is backed with gold reserves. As a result, the franc appreciates when the price of gold rises and vice versa.
Another reason could be that most traders who held long Swiss franc positions also had long gold positions in their portfolio. Risk averse much? Tell me about it. And when they saw that the Swiss franc was tanking, they decided to cut their losses with their Swiss franc positions and cover their losses by selling gold.
Then again, shouldn't traders have moved their money to gold now that there's one less safe-haven currency in the markets? While recent U.S. dollar strength diverted attention away from the precious metal, gold seems to be the next logical go-to asset during these times of risk aversion.
After all, the Japanese yen is also vulnerable to currency intervention from its central bank while the U.S. dollar could get hammered if the Fed implements QE3.
If you think about it, gold is free from all the fundamental problems facing the usual safe-haven economies. Bear in mind that the U.S. still faces several headwinds, such as poor employment and the possibility of a double-dip recession.
Look at it any way you want, but the basic law of supply and demand sides with gold.
It's elementary, my dear Watson. All other things held constant, the greater the supply of a certain good, the lower you can expect its value to be.
One of the many appeals of gold lies in that you can't simply PRINT more gold. While central banks continue to flood world markets with their currencies, thereby devaluing them, the supply of gold remains more or less constant, and so it stands to increase in value.
Rumor has it that Europe may need to come up with 500 billion to 1 trillion USD to shore up its banks. Across the Atlantic, it's said that the U.S. may inject up to 300 billion USD into the economy if Obama has his way with his proposed job growth program. And let's not forget that Japan recently expanded its asset purchasing program by 10 trillion JPY.
So there you have it, folks. Despite speculation that gold is a bubble, it seems it has finally gotten the green light to rise even higher. Suddenly, all those who were deemed insane for predicting gold at $2,000.00/ounce don't seem so crazy.
At this point in time, maybe it's best that we take our cue from central bankers, who have bought about 200 tons of gold this year alone. Either join the gold bandwagon or get out of the way and let it run its course.
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