Breaking Golden Rules
Modern day economics has added more value to Gold than the fundamental worth of the yellow metal. Although the most radical changes have come about by means of aggressive marketing of the commodity, Gold has always been the darling of the murky derivative trading world. The intrinsic value of the commodity has successfully attracted Hedge Fund managers across the globe so much so that billionaire hedge fund manager Paul Singer who oversees an AUM (asset under management) of $27 billion has been recently quoted saying “It makes a great deal of sense to own gold”. Singer believes, that in the highly competitive world of business, the weakness of the Dollar evolves into a pillar of strength, boosting the export volume of the United States even as the world’s Central Bankers are focusing on devaluing their respective currencies as well.
When Zero Means More
Near zero lending rates have failed miserably to recreate the much waited financial magic that Central Bankers were hoping for, while deflationary scenarios are back square on the court turning low inflation and high unemployment into a complex quagmire. The world’s top economies are fast spinning into a death spiral thereby propping up the dollar value of Gold and turning the yellow metal into a safe haven for market makers across the world. A close observation of the commodity’s price movements reveal uneven expansion and contraction in its prices, contradicting the conventional demand supply curve of time-tested economics. Even as I write this article, an Ounce of Gold is surprisingly trading at $1327, notches below its three-year high of $1392. The anomaly lies in the fact that the present dollar value of Gold is in stark contrast with the euphoric pricing of the S&P 500 that stands pat at 2159. In the words of Stanley Drukenmiller, a former Hedge Fund manager at Duquesne Capital, Central Banks across the world have lost their grip over monetary policies, adding shine to Gold’s safe heaven appeal. Drukenmiller went on to state that he was skeptical of the global financial scenario due to the Federal Reserve’s flip-flop on its current monetary stance.
A Golden Dollar
The fact that Gold is traded in Dollar, turns the equation in favor of a comfortable negative correlation. A weak Dollar brings cheer to Gold investors, shoring up demand for the precious metal while low-cost dollar dominated loans keep the base metal markets in China abuzz. It is evident thus that Gold would continue to enjoy the value conferred upon it by aggressive derivative bets as long as the potential threat of a possible liquidity crunch looms large. The equation tilts the scales in favor of high valuations in Gold much like the currencies that are pitted against the Dollar index. While excessive weakness of the Dollar gives rise to additional demand for Gold, a weakness in the Pound or the Euro stems the demand supply mismatch, keeping the valuation of the Yellow metal from shooting beyond its designated price band.