Wednesday , 21 February 2024

David Goldman: Major Spike in Gold Price Unlikely Anytime Soon

Despite gold’s move up to a new record, gold’s historical volatility is around 18%, compared to over 30% for the S&P 500. If gold and stock prices both embody systemic risk, why should their volatility diverge so much? Words: 482

Lorimer Wilson, editor of, provides below further reformatted and edited [..] excerpts from David Goldman’s (http:// original article* for the sake of clarity and brevity to ensure a fast and easy read. Goldman goes on to say:

Who is Buying Stocks?
With the 10-year yield at slightly over 3% and the earnings yield on the S&P 500 at over 6%, it’s understandable why institutional investors who require some yield would buy stocks. Even if the miserable US employment situation persists and the housing market remains in the dumps, America’s stripped-down, cash-rich corporate sector should continue to churn out some profits. Unless another shoe drops in the sovereign crisis or the miserable US economy turns sharply downward, equity prices should chop sideways.

Who is Buying Gold?
Gold is a different matter. Central banks and other investors who do NOT require current yield but need to preserve value have a quandary. The US is financing its deficit on the balance sheet of the global banking system – that’s why the Treasury’s TIC data keep showing huge purchases of Treasuries out of London and the Caribbean – as well as the US banking system. Because high unemployment and collapsed home prices foster deflation, the continued debasement of the US currency through balance-sheet leverage makes it unattractive as a reserve asset.

So what alternatives are available?
a) The euro is in danger;
b) Japan’s government is warning that its national debt at 227% of GDP threatens an eventual sovereign crisis for the yen;
c) the Canadian loonies and Aussie dollars are tiny markets;
d) [gold.] [Yes, gold, and , as such,] the central banks appear to be accumulating gold, slowly and steadily, buying on declines, and nudging the price up as gradually as they can in order to reduce their average cost.

That might be why we observe so little volatility in the gold price. The prospective buyers, namely the central banks, are so much larger than the gold market that they avoid actions which might cause price spikes.

* (David P. Goldman was global head of debt research for Banc of America Securities and earlier global head of credit strategy at Credit Suisse. He owns gold mining stocks, GLD, as well as some longer-dated gold futures. It’s a relatively small part of my portfolio, but insurance against serious trouble.)

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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