Increasing Global Risks and The Effect On Gold

When the IMF released its Global Financial Stability report stocks in the major markets in the US, Europe and Asia tumbled by 3-4% in three days.Although these stocks rebounded, the behaviour of financial markets underlined the importance of investing in gold to protect yourself from such volatility. According to the world gold council report that came afterwards, when stocks retreated, gold broke higher. Initially, it held steady when the US market went into retreat, however, when the sell-off became more global, gold rallied on higher. It acted as a safe asset more meaningfully.

If we are to believe the economic analysts that believe we may be heading for another recession, then the recent bounce in gold as a result of stock market drops is a good indicator of how gold could have a tremendous upside when the economy begins to spiral down.

Gold has been noticeably bearish because of a strong dollar. However, this sentiment might be tested in future. There have been some notable short positioning in the markets and according to the World gold Council, the net shorts recorded by money managers are at record lows since 2006. While the headwinds made by the strong dollar have been noted, the WGC report points out that the instability in the global markets will turn gold bullish in the near future.

In its report the WGC highlights the struggles in emerging markets. The continued problems the emerging markets have been facing in the last couple of months have been driving by the U.S. Fed’s rising rates that could lead to inflation. This has resulted in outflows from emerging countries and the strengthening of the dollar. There are additional concerns coming from emerging economies like currency problem in Turkey, the weakening of the Chinese economy as well as problems that countries like Argentina and Venezuela are facing. Overall, emerging markets are struggling in a major way and developed markets are trying to stave off impending disasters, the weakness of emerging markets might end up spilling over to developing markets, increasing the potential of a global systemic risk.

The World Gold Council report also highlights the global debt, which has exploded over the last ten years. Nonfinancial debt in areas with significant financial sectors has grown to more than 200%of the GDP. It will be costlier to relay this debt because of the rising rates. To add to that, the valuations of US stocks at the highest since the bursting of the dot-com bubble and Black Monday.

This might be the best time to buy gold. According to the IMF’s most recent report, there are reasons for gold to move up.

– The economic recovery across the globe has been slow and uneven, hurting emerging markets,

– there is a crippling level of complacency in the market

– Market valuations are extremely high

– The global debt is astronomical and further tightening will hurt the markets

These factors could be the catalysts that would propel the price of gold even higher. Gold is about to be more expensive in the near future. The obvious sale we’ve been having over the last couple of years are about to end. When the prices go up, they will go up a little faster than expected, leaving a lot of people who have not invested in gold behind. This article was brought to you by:

Melbourne Gold Company

Suite 701, Level 7 / 227 Collins st

Melbourne VIC, 3000

(03) 8678 2085

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