Around 1980’s the price of gold surged from $200 to $850 (Why?)
Situation in 1980’s (around) : 1) Inflation (double digit),
2) Commodities price were surging, and
3) Soviet was in War in mid east, as a result Oil was inflated too.
4) As a result of above 2, there was fear of instability. Inflation was driven by cause 2 and 3.
5) In 1971 Nixon changed that gold is not going to be standards any more for currency, and countries were getting used to new model, where in reality they had trouble working with the new system in controlling inflation (obviously it was a new system in the era of mainframes where study was all on papers)
Result :
Inflation adjusted gold price was surging.
Major factors
Fear of instability in the world (since one of major world powers were at war), and Inflation contributed by fear at war in mid east + new currency system in place with new double digit inflation rates.
Comparing it to today's world
Current Situation: 1) Fear of systemic risk with the economies of world where real numbers appear more to be just as temporary results (short lived) because of excessive volatility in the market. (Couldn't point the actual direction of the move)
2) Commodities price are under control in Developed Nations, and out of control in developing nations. (As said in those days systems dint exist to control this, but now with that in place, banks find it as a way to give the economy to start purchasing more)
3) Inflation is triggered in Developed Nations, but system does not respond, but Developing nations have high inflation. ( Inflation is healthy if by demand, but not due to short of supply & Developed Nations are cat on the wall with this factor)
4) Developing nations have and are buying debt from Developed Nations, in other words, liquidity should reduce in developing nations and increase is in Developed nations. It appears that liquidity which is needed to be present in Developed Nations where central banks expect inflation to be triggered as a result of it, but actual investment and liquidity increases every day in Developing nations. Watch this!!! Emerging market Investment opportunities appears to be the drain hole here.
5) On the whole, basic factors for gold surge such as Inflation and fear of systemic failure of world economy is still there, but where and how its present is what that needs to be defined.
Inflation should be expected only where there is liquidity or surge of liquidity. One cannot expect water out of a dried out spring. But in which part the world inflation is currently going up? its in developing nations, but finally its there.. so nothing to worry. Its a concern that, its not there in Developed Nations, and it makes sense that it need not be present, as liquidity never appears to be present or take shape in Developed nations as its expected to be because of few drains which emerged as a result of globalization.
Fear, the next factor. Should we teach economist and media of how to propagate fear? Never. They will do better a job, and they are doing it. Actually fear does exists, because , system that's suppose to work in a world of globalization which was child of capitalism doesn't seem to obey the law of its parent. Banks in developed nations expect a spin up in economy to drive inflation, but they don't have a system to stop its child (globalization) or control it that's created some drain pipes, because if they do that, Bonds will have to be paid down finally & that's something that's not possible now, unless developed nations start producing more than what they consume. Well finally fear exist in markets where investments are triggered. Its like 10% of developed economy is happy that they are able to stay in control of funds invested in Developing nations where they pay and maintain 60% of its economy. But the rest 90% of developed economy keeps consuming the produce of 90% of developing nations. Do you get it? Yes, globalization should slow down.. Well, what's here now is what's here.. . Finally “ If a system is known, and works the way we want to, there is nothing to worry. “ But, here a System is evolving, and investors who play by probability, cannot come up with a number to play with their investments, till they system is studied well. Fear will exists for any one in a new planet till the planet is mapped. So does this, system needs to be mapped of how its going to work. Till then fear will exists.
Conclusion:
Till the time, Fear stops growing, and Inflation happens where its expected to happen, certain assets that investors count on basis of perfect probability will continue to grow. Gold does satisfy this, as its used every where in the world, and especially used as a real world commodity in places like India and China. If their banks buy those gold reserves, it does makes sense, as we expect that's where current liquidity should be.
My estimations:
By Factor of Inflation:
Just by considering an ideal system an counting on US inflation from 1980 till now, we see an inflation of 200% over 30 years, and I expect gold to be hovering around $1200-1250 if thing were same as 1980.
Globalization is a like the savior here. Thanks. Do you know why? Money / Liquidity does not matter any more as long as its any where in this world. I don't need to worry any more about Inflation just in US alone any more. Global inflation especially including China and India should be considered, and we could see by 2011 we should see gold hit a price of $1500. Cumulating the inflation hedge alone with eliminating of fear factor that's present now in this new global economy, we can be sure, that gold can hit a price of $2000 by mid of 2011 or late 2011.
By Factor of Dollar Index:
History shows that Dollar goes up, gold goes down. Inverse proportion. Since dollar is further dipping, gold hasn't surged that much.. Why? Reason, significance of Dollar Index in relation to gold is affected by other stable currencies.
By Factor of Fear:
Truly there is no number for fear factor in Index. But this is just a hype. Tomorrow if we see news flashing with good numbers , this fear could be equal to nothing. I would say, there is a slight fear factor for Investors who are not able to formulate they economy. I would say, still fear factor is near minimal at the moment or its effect on gold price might have been there when mid east unrest was due to war in Iraq, but now its no more. NATO is having control of dry lands of Afghanistan. And this country in history had minimal significance in world economy, so does it now. May be NATO lost , world still does not looses anything, but if the War is won by NATO, then its good, as one more nation will join the bandwagon of manufacturing nations to supply batteries to power car in 2020 and beyond. So no loss nor gain. Spending on War just helps the economy as well. No doubt, some one gets the money when they sell weapon, and it comes back to the system of economy, increasing liquidity. But when the current system model is identified, that's the point where Gold will start its revision / correction, if there was numbers infused by fear apart form existing global average of Inflation.
Final
Inflation is there, and you can clearly see that its going up(global average).
May be a rebalance of where Inflation will happen might change in future. But there is so much liquidity to be experienced, when the new system is mapped and hauled.
Gold follows this global inflation numbers now, and will continue to do it.
No comments:
Post a Comment