BEHIND RECENT ACTIVITY IN GOLD
A sustained rally in gold prices could follow a financial catastrophe or other so called black swan event. Some commentators continue making the case a financial catasrophe is imminent – a case they have been making for years. But the recent Chinese currency devaluation isn’t a black swan event. It’s a legitimate decision made by a sovereign nation .
The following August 13th chart reflects speculation and short covering following China’s currency announcements. While fundamentals for a sustained gold price rise appear negative a squeeze on short sellers may supported the modest bounces.
THE FEAR, LOVE & TRADE TRADES:
Pundits like to make the case gold demand follows fear trades and a love trades. The fear trade moves markets when global economic or political conditions are precarious and gold is being bought as catastrophe risk insurance. The love trade moves markets when buyers are active in China, India and other regions where gold remains a traditional store of value.
However, while the fear and love trade are part of the demand story, markets also respond to speculation . The trade trade.
Recent modest gold price advances appear to have been driven by trade trades. Some buying in response to the China devaluations followed by a squeeze on short sellers and a price bounce.
GOLD AT A REASONABLE PRICE:
Mining costs are a key factor in determining reasonable prices and, if gold is bought at a reasonable price, owning it as insurance against black swan events and major corrections in financial markets can make sense. Should market prices for gold fall below levels it can be mined profitably supply will probably fall, demand will exceed supply and prices will adjust.
Metals Focus report on mining costs for the industry . Their recent analysis reveal a significant portion of production is already at a loss and at current levels there is the potential for substantial production lshortfalls. Metal Focus’s findings are detailed in this recent Kitco comment
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