Is speculation driving gold bullion to unrealistic highs?
December 09, 2010 – Is speculation driving gold bullion to unrealistic highs? That’s what many pundits would like to have you think, but there is absolutely no evidence to support it.
In the first place, decades of study have failed to attribute any long term price movements in either direction to speculation. While it is undeniable that speculators drive the short term fluctuations in commodity prices, markets by nature are self correcting and seek a fair market value. Successful speculation means betting on anticipated movement of that value and not some hope that the next guy is crazy enough to keep betting on a bust hand.
This year has seen investors taking unprecedented positions in commodities and that has been driving the market. That has enticed big fund managers to enter the market as well, and they have predictably taken short positions. But those funds are not known for wanton gambling – they speculate on well-founded predictions for real market growth. The balance of open interest in gold futures, about 42%, is held by non-commercial and non-reportable participants taking net long positions. Overall, the gold market is on solid footing and fairly well balanced.
Another recurring argument states that current prices are at record levels and therefore must be at or near their cyclical peak. But the premises are faulty. The historical peak in gold was reached almost 31 years ago when it sold for an average of $650 an ounce, or around $2,200 today adjusting for inflation. The implied second premise, that record prices mean the peak of the cycle, is also without merit. The economic conditions under globalization have time and again belied the significance of historical data relating to vastly different circumstances.
No, gold investments have grown, and will continue to grow, simply because gold bullion continues to play an ever greater role in global economics.
