Last Updated : 09 May 2013 at 12:35 IST
November 28, 2012 Wednesday: Gold for February delivery on the Comex shed weight, $26 dollars to be precise, as the session came to a close and settled at $1,718.80 an ounce. Spot gold, on the same day quoted down $25.20 at $1,717.25. Silver shed 1% and was seen at $33.725 an ounce.
From there, gold prices began to chart a downhill registering incremental losses.
April 12, 2013; Friday: With investors moving money out of gold and silver, the futures tumbled at a breathtaking speed on Friday night. Gold futures for delivery on June 13 closed at $1482.65 registering a loss of $82.25 or 5.26%. Silver for delivery on May 13 closed at $25.915 a loss of $1.782 or 6.43%.
The objective of this article is not to exhume the past. But it is worthwhile to think what took gold prices to astronomical heights way back in 2011 to $1900 levels and from where it fell miserably.
Clearly, it was some QE frenzy that caused the rise!
Quantitative Easing, in effect money printing, became a hit with central bankers around the world to such an extent that it led to bubble formations across various asset classes; especially commodities and real-estate. The easy money received by financial institutions were parked in asset classes like commodities.
And commodities include gold. As the money-printing machines began to work overtime, the fear of inflation and currencies losing their purchasing power became an apparition in its own right.
No wonder, gold assets were heavily sought after and herd mentality took over; gold zoomed. One has to note that with the commodities going up, manufacturers of commodities and goods found it a reason to start investing in facilities that would yield more commodities and more of money. This led to further investments and job creation. (Interest rates ruling at record lows ensured cheap loans that facilitated investments.)
Thus, the easing measures indirectly kick started money flow and some activity in the economy. Once again the world economy 'recovered' in official parlance.
But all these unconventional tools do have their limitations. The money printing cannot go on forever. Interest rates cannot remain low forever. It has to stop/rise somewhere, it will have to.
Because, at one point in time, the hydra-headed inflation would begin to bite; what you have seen as of now is just inflation in teens. The fact that it has not bitten yet shows the acute severity of the Great Recession. At some point in time, probably by the end of 2014, this scenario would change and chances of a hyper-inflationary environment taking a firm hold on the global economy would emerge.
“By 2014 end, or in 2015-16, we may see inflation climbing across the board,” said V.K Vijayakumar, Chief Investment Strategist, Geojit BNP Paribas, Kochi, South India.
This would once again create the potential for gold to be potent investment and hedge against inflation.
The rest would be history!
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