By Yan Petters – After seeing the headline, most of you must have thought that this was a rhetorical question – of course gold is trading in historical highs, it’s trading near $1,350 for the first time, isn’t it? Well actually, the answer is no – gold is not trading at real historical highs.
Back in January 1980 gold was traded at the level of $879 an ounce. $879 in today’s terms is worth approximately about $2,400; way above the current value of gold, which fluctuates near $1,350 an ounce. Remember, the nominal value of an asset is very easy for measurement, and can create awfully dramatic news releases, but there are several adjustments to make before you can claim its real value. Does this mean that we should all disregard the recent nominal highs of gold? Definitely not.
First of all there is the psychological effect. Over the years the market has determined an agreeable historic high.
Sometimes there is real economic logic behind it, and sometimes not, but the general acceptance of the top barrier is broadly understood. A breach of such an historical high – be it merely a nominal high – means that something broke; the market is no more relying on this top barrier, and usually there could only be one outcome: a massive bullish trend.
How massive you ask? Since the beginning of the year, gold gained over 20% of its value. Moreover, gold is about to complete a 10th consecutive yearly rise – its largest streak in almost 100 years.
The reason for this unusual trend (20% appreciation in less than a year is indeed quite unusual) is very clear, and widely known: in times of uncertainty, when fears from recession are dominating, investors tend to find gold as a safe investment. Especially now, when global markets are flooded with highly sophisticated financial instruments, the simplicity of gold appears to be quite appealing. This proves to be a self-fulfilling prophecy; gold is boosted almost on a daily basis.
It is almost impossible to find a long-lasting trend with hardly any corrections, but guess what, since October 2008 gold has been rising, and rising and rising… From $682 an ounce to almost $1,350 an ounce in merely 2 years.
Just to clarify, which date was that again? October 2008? Pretty much when the global economic crisis began, is it not?
Now we all must ask ourselves, what is the conclusion? What’s next? Well, the answer isn’t as easy as you may want it to be. In general, everything indicates that gold’s value can only strengthen during the next year, and $2,000 an ounce doesn’t seem to be an abnormal development any more. In fact, chances are that gold might reach $1,500 an ounce before 2012. The most significant risk factor is a series of positive data from the U.S. economy. Once fear from another recession is faded, gold is very likely to correct a big portion of its gains. In addition, when it comes to gold, a big part of the trend is psychologically based. This is why the bullish trend can last for so long, but this is also why the trend can reverse without any real economic logic to explain it.
Forex Market Analysis provided by ForexYard.
© 2006 by FxYard Ltd
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