Fear Driven Gold Market Posted by James Randolph on June 04, 2012
The gold market, especially in the last few years, has really been at the mercy of
fear and this dynamic will bring a lot of demand for the market in the coming weeks.
Sentiment is a primary driver of all markets, but the gold market particularly is affected
by fear because of gold’s safe haven asset status. When there is excessive fear in other
parts of the markets or even in markets completely unrelated to gold, investors
will flee to gold for its safe haven asset status and we have the potential to see a great
deal of that movement in the coming weeks.
The dismal jobs report on Friday brought about a 250 point down day the Dow
Jones and gave gold a surge back over the $1600 per Troy ounce level. Still, gold is in a
strong correctional stage during which time we’ve seen up to 20% off recent highs. There
is no reason at this juncture to assume the correctional stages over, though the market
activity has been so strong.
There’s going to be a lot of bickering between sides as the dynamics work
themselves out in the coming weeks. On one end you have the gold market which needs
to go through a correctional stage after an 11-year bull run. It’s simply a necessity for a
healthy market. Healthy markets go through correctional stages in order to maintain a
sense of equilibrium as they continue their overall direction. Without correctional stages,
there is an added inherent instability in the market of which investors need to be aware
On the other hand, there is such instability in other markets, particularly markets
that are exposed to or have to do with the emerging European sovereign debt problems in
all its multiple forms and this is causing a great drive towards the gold market. Investors
are using gold again, as they were two years ago in record volume, to hedge their bets
and positions and to protect themselves from the action in Europe.
This is only a logical move for any investor in the market at this point, but it will
cause some confusion as we grapple with both the correctional stage occurring in the gold
market and the dynamic of investors pursuing more safe haven assets with gold. The two
dynamics will work against each other and make the overall direction of the gold market
difficult for most investors to decipher.