According to some very interesting research by the World Gold Council, the gold market is as liquid as the bond markets.
And in terms of size, if it was slotted in with the bond markets it would be the third biggest in the world.
So I think it is just a matter of time before we see some of the funds that are looking for safety head over to gold.
In fact, recently gold has been trading like a risk asset once again. This hasn’t been the case for most of the year. But now, with the market risk levels dialling up, gold has been rising in price as it is supposed to.
I’ll admit I was worried by the huge drop in gold imports from the world’s biggest gold importer – India – causing a weak gold price. I think, at least in part because of this, gold has had a lousy year so far. However, after bouncing off the $1550 level again, gold is looking lively once more.
Could the market be looking at gold as the next lifeboat for funds? It would be about time if they did.
With the problems in Europe, a break-up of the euro is still a very real prospect. Gold is the perfect hiding place in that event as it has no counter-party risk.
However, if the European Central Bank (ECB) decides to increase their balance sheet again in another failed attempt to fix the debt crisis, then gold stands to increase as the euro is devalued.
Then in the States, the Fed is holding a two-day meeting, finishing with an announcement to markets on Wednesday night. There has been much build-up to this, with investors expecting the Fed to announce some form of money printing (QE3).
The head of the $260 billion PIMCO fund, Bill Gross (known in the markets as the Bond King), has been more vocal than most. He has about half of his enormous fund positioned for QE3, and expects an announcement about this on Wednesday.
Gold has risen on the back of QE in the past, though less the second time round than the first. What happens this time depends on what the Fed comes through with – if anything.
So expect the gold price to be as volatile as a kid on red cordial over the next few days as the market tries to second guess the next moves from the Fed, and possibly the ECB as well.
But that’s not all. Something else that tells me it’s a good time to buy gold is the lack of media coverage.
Google trends tracks how much media coverage there is of certain keywords. Right now – media coverage on ‘gold’ is at a five-year low.
Last time media coverage dipped significantly was January 2011 – which was also a good time to buy. The last time it peaked was August 2011, which was a good time for short term investors to sell.
Of course, using media coverage isn’t a fool-proof method, but I’ve got to admit it has worked pretty well as a contrarian indicator in the past. If this holds up, then the current 5-year low in media coverage of gold could make this the best buying opportunity in years.
This certainly stacks up against what we’re looking at in the global economy right now; the euro heading for the chopping block, and the chance of more money printing from both the Fed and the European Central Bank in the near future.
This week in particular could be volatile for gold. So we’re having a sweepstake round the office this week to predict the gold price this Friday!
Most of the predictions lie between $1425 and $1764.
One brave soul has staked his claim on $42,000! We’re not shy of making a brave prediction round here of course, but I think the odds might be a bit long on that one!
This is all just a bit of fun of course, and overlooks gold’s more serious role as a long term preserver of wealth.
Keep your eye on the gold price this week. Especially on Thursday, after the Fed meeting.
Dr. Alex Cowie
Editor, Diggers and Drillers
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