Gold was thought to be a perfect hedge against the stock market because it moves in opposite directions. Since the market came crashing down with the downfall of investment banks, this theory held true and the price of gold shot up almost immediately as Dow Jones slipped. However, we now see both the stock market and gold moving in tandem, both heading in the same direction.

There are two main reasons for gold being driven downwards. Firstly, gold and the US dollar have a negative correlation. The worldwide economic downturn has ironically cause the US dollar to appreciate as it is still the currency of choice in international trades. Whilst the market stocks up on the dollar, it becomes clear that it is a better investment tool than gold, thus the opposite directions taken between the two.

The other reason is due to the sudden influx of gold supply in the market. Many fund managers are increasingly needing to liquidate their investments to face massive investor redemptions. As such, there has been a lot of sell down of holdings in gold.

How then does the future of gold look like? Many analysts believe that over time, the US dollar will eventually face devaluation. And when this happens, the price of gold will see an uphill trend (remember that they are negatively correlated?). It is only a matter of time. If you subscribe to this theory, then this will be a good time for you to pick up gold and wait for the dollar to fall.

On the local front today, the price of gold has dropped to RM84.80 (buying price from Public Bank’s Gold Investment account). It remains to be seen if it will drop further, but it is as low as it gets for now.

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Commodities, Currency, Economy, Investments, Stock market