Daily Management Review

Why is the safest asset getting cheaper?


Gold has an image of a very reliable reserve asset, capable of withstanding any crisis or a surge of inflation with profit or at least without losses. So in turbulent times, the demand for gold and the prices for it usually grow.

Why, then, is gold falling in price now? After all, there are so many crisis phenomena around: the trade war between the US and China, the withdrawal of the UK from the EU, the collapse of the Turkish lira, the domestic political and debt problems of Italy, the conflict over the Iranian nuclear program, the tightening of US sanctions against Iran and Russia, and now the impeachment issue of Trump.

And the price of a troy ounce has been steadily falling since April against the background of all these potentially very dangerous for the global economy and global financial stability of events. Then, the quotes reached the annual maximum at the level of 1365 dollars, then by mid-August they decreased to almost 1170 dollars, the lowest level since January 2017. In other words, gold has fallen in price by almost 15 percent for some four months. In the last days of August, quotations rose to about $ 1,210 per troy ounce after a small rebound.
"Professionals are running away," - says Boerse-online, analyzing the market for gold futures. "Never before there were so many players on the decline in the gold market," states Carsten Fritsch, commodity market analyst at German bank Commerzbank. "The noble metal widely known as "anti-crisis asset" and "quiet harbor " found itself in crisis," - concludes  dpa news agency.

What is the reason? The Capital magazine provides a wide variety of explanations from experts. Some point to a low demand for gold on the fundamentally important market for India, while others admit that modern investors regard stocks of such technological giants as Amazon and Apple as the most reliable assets. Others believe that the market is afraid of possible large sales from the side The Central Bank of Turkey, which is plunging into a crisis, and so they are prudently closing positions.
Still, one of the main reasons for the fall in the price of gold is strengthening of the US dollar. In an interview with dpa, the analyst of German bank HSH Nordbank Jan Edelmann explains: gold in the world market is traded for dollars, and if the US currency becomes more expensive, many market players, especially in emerging economies, have to cut purchases, which leads to a fall demand. A similar effect, by the way, is observed in the oil market.

In general, the dollar - the eternal rival of gold, recalls the agency dpa. According to Karsten Fritsch of Commerzbank, investors, also nominated in dollars "by American investors, are considered reliable high-class assets." At the same time, bonds have one extremely important advantage: they ensure regular receipt of interest payments, whereas gold simply lies in the investment portfolio in anticipation of the growth of the exchange value.

All this overshadows prospects of the noble metal, because a study of the British analytical company Capital Economics came to an unambiguous conclusion: gold in the past was more expensive only in those cases, when the dollar was simultaneously cheaper.

In such a situation, experts do not expect a "renaissance" of gold: there is no question of any return to the historic maximum of seven years ago, when the noble metal cost over $ 1,900 per troy ounce. But the specialists still count on the certain growth of quotations in the foreseeable future. Thus, Jan Edelmann believes that the gold has already passed the main part on the way down, and now the movement can start to rise. Carsten Fritsch is waiting for a technical rebound: at some point, many players will have to close their positions, and this will lead to growth prices, the more so if a real crisis breaks out somewhere on the planet Moreover.

The Boerse-online portal quotes by Nitesh Shah, analyst of the raw materials markets of the European branch of the US investment company Wisdom Tree: "Our base scenario is based on the growth of quotations to $ 1,307 per ounce by mid-2019."

source: dw.de