August 9, 2012

What Happened to Gold?

FinancialSense.com Full Article

BY LAWRENCE ROULSTON

Here we are on the brink of another global financial meltdown (at least according to the popular press) and the gold price is not moving. This lack of action in the gold market in the face of pending disaster troubles some people. They are concerned that gold may no longer be the ultimate safe haven.

In fact, $9 trillion worth of gold has been stashed away by consumers, investors and governments to be called upon at some time in the future. Only a tiny portion of that gold horde is actively traded. The rest is being held tightly for the long-term.

The price of gold, like any other commodity, is determined by the daily trading activity, which reflects only a very small portion of the total holdings of gold. The price is set by those who go in and out of the market. The majority of gold holders, who hang onto their gold, are not counted in the daily price setting. On any given day, the balance of sellers versus buyers, reacting to daily news headlines, determines the short-term price.

It is far more instructive to look at the longer-term trends. Gold has appreciated 6% since the start of this year, and is up 8% from a year ago. At this moment, gold sits at the bottom of a short-term dip. In the last decade, gold has appreciated at an average annual pace of 19%. There have been wild fluctuations along the way, but the trend is clear.

Perhaps the most important factor in the short-term gold market is that investor expectations are pushed well beyond realistic levels. That is, people are told to buy gold because the price will be going to the moon next week. As a result, when the gold price rises, investor demand increases, contrary to rational analysis or the patterns for most other goods.

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