August 22, 2008, 6:31 am

Gold heading back to bottoms?

by: The Financial Blogger    Category: Investment, Market and Risk,Trading
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Gold Graph



What exactly is the chart above? It’s the chart of GLD, the most liquid and known gold ETF, it tracks fairly well the price of spot (current) gold. And you might remember how gold only a few weeks ago reached the 1000$ milestone (the ETF was around 100$). At that time, specialists were predicting 2000$ gold (know of any similar stories… oil?).

But guess, what, the price of gold went down a lot lower and a lot faster than anyone could have predicted (or at least any predictions that I saw). It event went down 800$ for a short little while. But what is driving these drastic movements? How could gold go down 20% so fast?

There are a lot of different factors involved here. Most analysts would agree that the biggest factor is the US dollar. In short, many investors and even governments have large amounts of money stacked away because of very different reasons and while they do invest a lot of those resources, they will also want to hold very safe investments as well that can be exchanged at any point in the future.

Historically (in the past century or so), Gold has always been one of the best ways to do so. Gold has a value that has been measured for centuries. While some currencies have became almost worthless, Gold has always been seen as a commodity that could be exchanged and thus was a safe currency.

As years and decades went by, the domination of the US in the world economy made many people believe that the same could be said about the US dollar; it was without risk, would never suffer any serious drawback and was backed by the most powerful entity in the world, the US government.

But advance to the past 3-4 years and you see how investors around the world started to worry about the fate of the dollar, how much effect the US economy problems and the credit problems would have on the US dollar. As well, how long can a country go by borrowing more and more every year? That’s the question a lot of investors had been worrying about that caused many of them to use their dollars to buy gold.

But did it go too far? Did investors want to sell US dollars so badly that it went down more than it should have? I think that’s the case and that’s why I would still go long gold via GLD (ETF).

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