Investment In Gold

FOREWARD: I am pleased to re-produce an article contributed by my friend Chan Cheh Shin who has volunteered to share his technical knowledge regarding gold as a sought-after alternative asset in the current episode of global economic and market uncertainties. Chan is a fund manager stationed in Kuala Lumpur and Singapore. I invite him to be a regular contributor to this blog site, and I believe his "maiden" contribution now will be the start of more learned sharing from him henceforth.

Cheers to Chan!

Disclaimer: The contents are based on personal opinions. Therefore, it is left to readers to conclude whether to concur or disagree with the contents shared here, and hence the points expressed by the contributor should not be deemed as definite events bound to take place.

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EUR breakup will lead to gold heading deep south.

Let's start off by looking at the following charts:

Without QEIII from US, gold is not going to surge. Gold is priced in USD. A sudden surge in USD supply would automatically push the price of gold up. So, it depends on whether another QE will take place.

The gold surged again in Feb 2011 again as EU crisis intensified. But it had a sharp negative down move since Sept 2011.  This tied in the EU crisis spread to Italy (the 3^rd largest economy in EU). Please consider the Italian government yield curves movement below :

The white line (1 sept 2011) moved upward (i.e. yield of Italian government bonds went higher as market fear Italy will fall) to Nov (the orange line). The gold price started sliding down.

The rational is that if EUR goes “ka-po”, USD will be the safest heaven. That leads to higher demand for USD. That alone has inverse effect on gold. Gold price started to drop.  Paper money won.

The above leads to the following points :

1.       Once the US does not flood the market with USD, gold will not surge.

2.       Once confidence for paper currency returns, gold will slide.

EUR is like a structured product. If it breaks, the individual component will surface and be reassessed by the market. Out of the group, the most favorable will be old German currency : Deutche Mark.

Once the Deutche Mark re-surfaces, the signal to the market will be that paper currency is here to stay and governments will do anything to defend their individual paper currency.

Hence, gold will then take a back seat and plunge.