By Yan Petters – The most discussed topic among many traders over the past few days revolves around gold. And there is a good reason for it. Gold has recently gone above $1,414 an ounce, marking an all-time record high. In addition, traders that opened a long position on gold at the beginning of the year (without using leverage) saw almost 30% return till now; and 2010 isn’t over yet. First of all, let’s understand what triggers gold’s bullishness. Below is gold’s weekly chart.
The horizontal line divides the chart into two. The line is drawn at September 15, 2008. What is so special about that specific date you ask? Very simple, this is the date that Lehman Brothers filed for Chapter 11 bankruptcy protection, and by many economists is considered to be the first official day of the global crisis that we’re still trying to recovery from.
It was merely half a year after gold rose to an all-time high of $1,032 an ounce. However gold was then in the midst of a bearish move, which took the commodity below $750 an ounce. There were speculations that gold had become an overlapping excess, and that exceeding over $1,000 an ounce was a rare phenomenon, which won’t repeat twice. Lehman Brothers filed for Chapter 11 shortly therefter. After a month of mayhem (which took place at every financial market in the world) gold began what is now known as a unique trend, which was very unlikely to take place before then. In about two years gold has doubled its value (doubled!). This is not one of those over-sophisticated financial instruments that Wall Street keeps inventing; this is one of the most ancient commodities in world history.
So how can we explain it? It appears that gold has become the new official haven for investors. This has more psychological logic than economic, but the strength of this trend is abnormal to say the least. Over the past few months you heard many stories on why gold prices are advancing. One time it was the debt crisis among several nations of the Euro-Zone. Another time it was the continuous negative employment data from the U.S., and now it is the European state-funding difficulties. The main understanding here isn’t the specific reason, but rather the common reason of them all – fears from deteriorating economies, which will lead to sharp drops in global stock markets. So how can you reduce the risk in your portfolio? Open long positions on an agreeable haven – Gold.
Now, what does that mean for the future? It means that as long as the uncertainty remains, fears will continue to prevail, and haven investments will continue to climb.
In the past week the Federal Reserve has announce a new $600 billion aid stimulus to the economy, this almost guarantees another few months of uncertainty. In addition, the Japanese economic prospects are still in the dark, and very few predict positive developments for it. Adding to the gloomy condition of so many European economies, it is safe to say that uncertainty will continue to blossom in the market. One of the side-effects is likely to be another boost for gold prices, which could probably reach $1,500 an ounce, before the end of 2010.
Forex Market Analysis provided by ForexYard.
© 2006 by FxYard Ltd
Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.
