Gold is currently trading slightly above the 1,000$ mark raising the 1,000$ question for the third time. Will Gold continue to rally beyond 1000$? Last week Gold took the market by surprise rising strongly and breaking the range of the 930-960 with a strong burst of demand pressure. Of course Gold is known for a good hedge against inflation or radical deflation and as Sovereign debt soars around the world, Gold looks like a safe bet. But that circumstances are known for several months, what then is the driver behind this strong gold demand which suddenly refloated?
Gold and the VIX: The VIX which is also known as the fear indicator is a traded future at CBOE and points on market volatility. Whenever the VIX rises market volatility is high and investors turn to highly liquid assets to avert risk. Gold is one of the most highly liquid assets around and when volatility is high gold tends to look attractive. When Gold spiked from around 950$ to 999$ in two days the VIX was actually in its highest point since July, thus pointing clear relationship between Gold and volatility. Since recovery is expected to be bumpy this factor will continue to play a rule.
the Fed and the US government will start implementing exit strategies to pull stimulus out and move interest rates to higher levels. When examining the fed historic rate hikes in recessions it is evident the fed began hiking rates only after unemployment has peaked hence one might conclude that in a recession unemployment takes the lead as per policy is concerned. Since unemployment continues to expand with no real evident relief exit strategies still seem remote Therefore the combination of high liquidity from stimulus and low rates is expected to continue and pose a friendly environment for Gold prices.
Gold Miners and their hedge: Lately there has been continuing reports on the improvement of credit conditions for Gold miners. The result is that Gold miners are less sensitive to lower Gold prices and actually were able to gradually remove their hedge against a fall in prices, and by that removing much of the counter pressure in gold rallies.
If these important factors will continue to play with strong presence, it is likely Gold buyers will feel more and more conformable to check new highs for the metal.
The 1000$ Question Part 2
