A risky gold position

Quick thought on gold prices correlation with risky asset recently.  As I active watch the markets recently, between US Treasury, gold, advanced countries listed equity, forex Mundo pairs.  I’ve reached some preliminary conclusions on gold price’s behavior.  I don’t know when these characteristics would change (and when they change they would just change very fast, like everything else in the market) – but let stop and think for a while:

1/ In short-term (a week) gold prices move with risky asset. 

This short-term characteristic are extremely clear in the previous 7 days.  For the last week, gold price movements were identified closely with S&P 500.  Interestingly enough, I warned about this phenomenon 1 months ago in this post: Global risk appetite.  A possible explanation for this phenomenon of gold’s risky-asset-side-changing is: Long term investors – who buy and hold gold for a long-term now stop buying and short-term investors – who have just speculated on gold for previous 3 months are controlling the price.

Source: MarketWatch.com

2/ Longer-term investors are rebalancing or waiting for the correction.

I’ll develop a story like this: as gold steady increases since 2000, those steady increases were attributed to sovereign funds, long-term buy and hold funds, high net-worth individuals, and family offices who seeks to diversify their holdings.  As gold prices increase to a noticeable level, short-term speculators started to get in and trade in and out with the market (much more than previous).  To this phrase, gold price now off the chart as a steady asset storing value but becoming a risky asset – just as the risky players who are controlling the market.

From my own opinions, gold’s changes to this risky characteristic because it gets too high too fast.  If thinking of gold as an asset class (that I bet most anyone think that way: Long-term investors want diversification, short-term investors seek profit, perhaps only national banks are the only one don’t see that way) you have to care about the prices.  When they get high, short-term investors would take profit and long-term investors would perhaps seek rebalancing.  When anything become so sensitive to the price – that asset class becomes risky: Market risk – or the risk of volatility when prices go ups and downs.

3/ Where are we going from here?

We have many theses with gold.  The leading thesis tells that gold is a currency inflation defender.  When US$ loses value, and other currencies are printed too much, we would come up to a period when we have currency inflation – and gold, as tradition, is then is treated as money (not asset class – a clarification in this point is crucially important) hedge against that risk.

So this thesis suggests gold prices to move diverse with how much money printed out – not how stock markets around the world are acting or how oil is selling.  That is the only thesis conclude gold prices would increase and increase and increase unless a gold-standard is taken back as pre Bretton Wood 1971 period (I mention the reverse relationship of gold and money printed once in this note: Feeling the world closer everyday).

The totally contradict thesis treats gold as an asset class – not money.  As an asset class, gold suffers with market ups and downs.  This view goes along with portfolio rebalancing, diversification, and short-term trading/speculating.

We might have a perfect blend of “gold as money” for long-term view and “gold as asset class” for short-term view.  I see thing this way.

I see things particular dangerous when short-term minded players take control: price volatility, boom and burst, etc.  If we take $3000/oz as a “true equilibrium” for gold for example, there will be no problem for gold to reach that level for 10 years (eliminated currency inflation).  But if gold reach that levels for the next 10 months – I would very doubt a crash even that is the “true equilibrium”.  Reason? people can’t get familiar with that price level that fast.

So my thesis for this time: people didn’t get familiar with the price at $1700-$1900/oz that fast.  Short-term traders take profit, short-sellers are getting in, and longer-term investors rebalancing.  After this period is over – gold prices might increase again.  Yet in line with relatively total small market cap, I hold the view that we wouldn’t be back gold-standard and because of that, gold price won’t increase forever, you can see more here: Don’t panic on gold.

For now, at least the first signal I want to see is the correlation with risky asset to be over.

Tri Ton

Businessperson with private equity expertise. Interested in strategy and investment.

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