Gold’s meteoric price rise makes Wall Street dizzy. The run is semi-rational and has caught professionals off-guard. Many do not have gold holdings and are thus missing out on the bull market.
Can higher allocation for gold be justified? Gold does not generate any income. Neither there is any clear measure for its fair value. The cost of production for the metal stands at $ 1500 per ounce. It offers little guidance why the metal trades at $ 4200 — $5000. Central banks will keep interest rates low, and major currencies lose in value. Money managers adapt to this new normal. If investors increase their demand even by 14 per cent, the metal will reach $5000 by next year.
Wall Street follows the liquidity train. The rise in price commenced three years ago as China’s central bank and Chinese households increased gold holdings. This sentiment spread to the USA. The mom-and-pop traders are the market leaders. American households can see gold as an essential hedge against inflation and devaluation of the dollar. That makes the gold surge higher. The Chinese action is also a wild card. The People’s Bank of China has increased its gold reserves.
The executives are going with the flow but are risking their credibility.
The case for bullish grid is built on shifting sands.
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