Software & Finance

Gold Prices are going down?

When stock market starts to go down, people will jump to safe heaven like Dollar, Gold or US treasures. On May 12, Gold prices reached its high at 1249.70 USD per ounce. GLD is an open ended exchange traded fund and it holds the physical Gold. This fund can issue shares for deposits of Gold and vice versa. GLD is good investment and can be considered as a paper gold. It is easy to buy and sell, because of its high liquidity.

The following table shows the Gold Future prices as of May 14, 2010.


The above table shows that there is no cost associated in storage and there is super contango unlike in UNG (United States Natural Gas Fund).

Is this is the right time to buy gold? My answer would be NO. Look at the following table. Gold prices rallied from year to date (04 Jan - 14 May 2010) by 9.79% in USD, 6.83% in INR, 22.39% in GBP and 27.82% in EUR.


Gold is priced in dollars. Whenever dollar goes down, it becomes cheaper and attractive to buy for foreign investors as their local currency is getting stronger. Hence Gold price will spike in USD. Because of Euro Zone Debt issue, dollar is getting stronger and Euro is loosing its value. In this case, gold becomes very expensive for Euro Investors, but still they buy Gold because of panic in the recent days. Once this panic settles down, Gold will become very expensive for foreign investors and they would stop buying Gold and start selling Gold. Investment demand for Gold from Euro Zone will come down once the panic is over.

As Greenback is getting stronger and when Fed start rising the interest rate, Greenback will be attractive to foreign investors because of high interest rate. It will also push the Gold price down.

But historically since 1983, Gold prices have not come down more than roghly 25-35% from its peak. So it is a good idea to wait to buy Gold until it goes down by 25% to 940.00 USD per ounce. If it goes down further from these level, it becomes more and more attractive buy Gold.

Posted on May 16, 2010