Gold Booms in the Dubai Aftermath

By: Miles_Banner

Here in Britain we’re use to bad weather, it’s been frosty and raining here all week. It gives us our sense of humour we tell ourselves as we step out the door and open the umbrella. But there are times when you get caught out. Times when everything looks rosey outside but then suddenly the clouds form and the skies open up and the rain poors down.

Last week something similar happened in the markets. Everything looked normal. Gold reached another top, the dollar continued to slip to it’s lowest in 15 months and equities were on the rise. And then….

On a quiet Wednesday afternoon Dubai World released news that they needed more time to pay the debts they’d racked up. This sent the markets into overdrive. The news came just before the religious festival, Eid. Which meant many of the company’s senior officials were not available to comment. This stoked the fire of confusion, doubt and fear. And, as we all know, fear is a powerful mover in the markets and it once again changed the direction of trade.

On Thursday the FTSE fell 3.2 %, the biggest daily fall on the market since March.

On Friday the VIX index of equity volatility, a key measurement of risk aversion, jumped 21 per cent. Earlier in the week it had set a 2009 record low.

The news hit everything… but not all in the same way. 

Following the news the people fled in their droves to the safe haven of the dollar. Now this may seem surprising given that the dollar has received a lot of press recently about its decline and lack of stability. But, in this scenario, people could see that the problem was a lack of liquidity… a lack of cash. And they flocked to it like a moth to a hot lamp.

The dollar rallied, and the gold price fell.

The pound takes a pounding

Just a few days later and the story begins to unfold. European banks are thought to be exposed to half of the $80bn debt. Dubai World also seems to have been investing heavily in UK commercial property.

Both are bad news for our rainy country and its currency. If Dubai World are pressured into selling some of their assets, which looks likely, support for the pound from foreign capital could wither.

The bigger picture

Now investors are left with a much more fragile footing. The Dubai episode has reminded investors how uncertain creditor rights can be.

It brings into question how safe sovereign debt is… in particular investors are starting to look around at who could be next… maybe Ireland? Maybe Greece?

The risks have just got higher.

But what does this mean for the price of gold today?

Well if you take a look at what’s happened since last Wednesday, when the Dubai World news hit, the markets have pretty much realigned with the path they were heading in before. Gold is reaching new highs again, breaching the $1200 mark, and the dollar is back down again.

The fear is being massaged away and blind panic is being edged out. The aftermath of the Dubai World debacle is a market that looks identical to what it was before, only now investors are watching closer for news, they’re paying closer attention at world events and they’re reassessing risk.

Gold is for the risk averse.

Two weeks ago the World Gold Council showed how demand for gold from jewellers was waning in most countries [We reported this in Gold’s evolving supply and demand]. It highlighted the demand for gold was coming from investors, as it has been for many years now. The problem with demand coming from investors is that they derive their value from comparing what else is going on, where else they can be making money. Consequently if they see a chance to make more money from something else then they will sell gold to put that value elsewhere. In doing so the gold price today becomes much more vulnerable to what else is happening in the markets today.

At the moment we are in a risky environment and this is feeding the price of gold. Together with what looks like a revaluing of the dollar, risk is pushing the gold price higher and higher. $1500 will be the next milestone.

We leave you with a quote from one of favourite writers, Bill Bonner…

“Gold’s best part is still ahead. And this is not just a bull market; this is a fortune maker. Gold still hasn’t entered the bubble phase. It is just a very strong bull market. Eventually, it will soar… adding $100 in a single day. It will take our breath away. You want to be in it when that happens.”

Regards,

Digger Gold Price Today

P.S Digger writes a weekly email analysing the gold price and the gold industry. Visit Digger at Gold Price Today (http://goldpricetoday.co.uk).

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