Investors Seek Safe Haven in Gold
For the past few weeks, the stock market has been red across the board. Many commodities have also fallen. Whatever happened to predictions of crude oil to top $150 a barrel? It now trades near $90 a barrel. Where do you put your money when almost everything seems to be going down? Many look to gold as a safe-haven. And although it has rallied in recent weeks due to uncertainty in the stock market, I still believe that investors can find good value in gold over the next 3-6 months.
The chart below shows movements in the price of gold futures for December delivery dating back to February of this year. In March, 2008, the gold market saw record highs over $1,000 an ounce, but then dropped quickly in the following months to about $860 in May. The market then rallied into the beginning of the summer until mid-July, when gold hit a summer high of $999.
If you look at the chart above, it almost seems as if the market bounced off the psychological $1,000 mark in mid-July. From there gold had a stunning fall, reaching yearly lows near $740 on September 11. Gold has since rebounded, trading near $880 on Tuesday, October 7.
Why did gold reach $1,000 in March? It was because of the uncertainty in the stock market. So what has happened since then? Iconic investment banks have failed. Housing problems have worsened. Foreclosures have climbed. Banks are lending less. And unemployment has risen. There is much more uncertainty now than there was earlier this year in March, when gold reached record highs. I expect more investors to shelter their money in gold, and I believe this market still has plenty of room to rally.
Recently, there has also been a lot of physical buying of gold. Recent reports have said that the U.S. Mint’s inventories of the one-ounce bullion American eagle coin were depleted and sales had to be suspended until more are produced. There simply wasn’t enough to meet the demand.
Many American investors are buying the gold physicals and/or futures because it is viewed as a safe-haven. In light of the dramatic drops we’ve seen in the stock market, it makes sense that many Americans would look to gold for shelter.
However, we live in a global economy, and there are many other investors from countries like China that are also buying gold. Chinese regulators recently eased regulations on the buying of gold, which will most likely put it within the grasp of many more potential investors. Keep in mind that China is a country that saves over 30 percent of its income, unlike the U.S., where the consumer savings rates are near 2 percent. This global demand should push gold prices even higher.
The government’s plan to bolster the economy with its bailout bill didn’t revive confidence in the market. Just look at how the stock market reacted on Monday, October 6 to the passage of the bill. At its lows, the Dow fell over 800 points, its biggest point-drop ever. I don’t see much light at the end of this tunnel just yet. As markets continue to bleed, gold may be the ideal investment for the next 3-6 months.
Daniel Pavilonis is a Senior Market Strategist with Lind Plus. He can be reached at 800-801-9302 or via email at dpavilonis@lind-waldock.com.
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