The fluctuations that gold has experienced over the last few years illustrate the uncertainty surrounding how the metal is priced.
The ambiguous nature that surrounds the various determinants of the commodity's value should be known by anyone who wants to make money trading this asset.
Yellen nomination coincides with price drop
A perfect example of this uncertainty is how the commodity has behaved amid the recent government shutdown and also the announcement that Janet Yellen has been selected to serve as the next chair of the Federal Reserve.
The precious metal declined on October 9, the same day that President Barack Obama announced his decision to select Yellen, who currently serves as vice chair of the Fed, for the top post at the central bank, Reuters reported.
This scenario might seem confusing to some, as Yellen is perceived by many financial services industry participants as being a "dove," meaning that she has frequently indicated her preference for harnessing asset purchases to stimulate the economy, Robert Brusca, chief economist at FAO Economics, told MarketWatch.
Yellen is expected to sustain the bond buying that was started while Ben Bernanke was at the helm of the Fed, economists have predicted, according to the news source. In the event that they are correct, gold should receive support from the continued use of these purchases.
If the aforementioned scenario is accurate, one would think that gold would surge once they found out that the vice chair of the Fed was nominated for the top post. However, the metal fell during the day that her selection was publicized.
Gold lacks surge amid shutdown
Another occurrence that can illustrate the uncertain nature of gold's price movements is the fact that even though the federal government has been shut down for more than a week starting on October 1, gold did not surge in price, Reuters reported.
It was also noted that even though the U.S. government had been experiencing a partial shutdown for more than one week, global market participants did not cause the commodity to spike in price, according to the news source.
Gold has frequently been considered a safe-haven asset, drawing the interest of investors when their tolerance for risk deteriorates. Gold reached an all-time high later in 2011, driven higher amid concerns that the United States would default on the payments for its debt. The appreciation experienced by the precious metal was largely attributed to the lackluster sentiment of global investors.
Safe haven questioned
While this relationship between risk aversion and the price of gold may seem simple enough, the failure of the precious metal to rise significantly amid this recent shutdown of the federal government has led some market experts to suggest that investors no longer thought of the commodity as being a store of value that could protect them from risk, the media outlet reported.
"This lack of response to the U.S. shutdown may mask an underlying negative investor sentiment," James Steel, chief precious metals analyst at HSBC, told Reuters. "At the very least gold's safe-haven bid is lacking. Some of the explanation for this may be that currency markets have not moved sharply."
Investors react to gold bear market
This is certainly not the only time that market participants have questioned the nature of the precious metal, as some expressed their lack of faith in gold earlier this year. In April, gold plunged into a bear market, having fallen 20 percent from the high that it reached late in 2011.
That month, investment bank Goldman Sachs Inc. reduced the commodity's price forecast, noting that the precious metal did not surge amid news that small euro zone nation Cyprus was suffering economic turmoil, according to The Sydney Morning Herald.
Gold falls to 34-month low
The commodity extended these losses over the next few months, with futures for the metal falling to less than $1,200 per ounce in June, Bloomberg reported. This represented the lowest value for these contracts in 34 months. Donald Selkin, who contributes to the oversight of $3 billion as chief market strategist of National Securities Corp., noted the sharp deterioration in confidence experienced by investors.
"When the market gets into a trend, people just want to follow it, and now we're in a severe downtrend, so the psychology has become terrible," he told the news source.
The metal recovers
Later in the year, the precious metal staged a recovery, rising above $1,400 an ounce and entering a bull market in August, according to MarketWatch. Gold experienced some sharp gains that month, which were attributed to concerns related to the U.S. debt and potential military action in Syria.
"Gold will be a beneficiary of any military action in Syria," Paul Herber, portfolio manager of the Forward Commodity Long/Short Strategy Fund, told the news source. He said that at the time, "investors are selling equities and moving into safer assets … of which gold is one."
This explanation would support the role of the precious metal as a safe-haven asset. Amid all these different signals, those who want to make money by trading gold should be aware of the uncertain nature of the commodity.
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