Sunday, October 9, 2011

Expectations, Market Volatility and the Emerging Gold Bubble

Markets today fluctuate at the drop of a hat. For example in the following video you see that "After Rupert Murdoch gets hit with a pie, News Corp.'s stocks spike"...

This shows that an incident that has nothing to do with business or the proceedings at hand can boost the prices in today's stock markets a great deal.

So when Senator Bernie Sanders writes;

Why have oil prices spiked wildly? Some argue that the volatility is a result of supply-and-demand fundamentals. More and more observers, however, believe that excessive speculation in the oil futures market by investors is driving oil prices sky high.

A June 2 article in the Wall Street Journal said it all: “Wall Street is tapping a real gusher in 2011, as heightened volatility and higher prices of oil and other raw materials boost banks’ profits.” ExxonMobil Chairman Rex Tillerson, testifying before a Senate panel this year, said that excessive speculation may have increased oil prices by as much as 40 percent. Delta Air Lines general counsel Richard Hirst wrote to federal regulators in December that “the speculative bubble in oil prices has concrete detrimental consequences for the real economy.” An American Trucking Association vice president, Richard Moskowitz, said, “Excessive speculation has caused dramatic increases in the price of crude oil, which harms end-users like America’s trucking industry.”

This is a claim that should be taken seriously about the unreliability of some of these stock market reactions (afterall, with much of the wealth with a small number of people (i.e. income inequality), it doesn't take much to skew a market)

In fact, it has been shown that even 'rumors can move markets'.

The Emerging Gold Bubble

Gold price hits all-time high on US debt concerns

The price of gold has risen to a fresh all-time high of $1,594.16 an ounce, and the dollar has fallen, on concerns the US may default on its debts.

The moves came after ratings agency Moody's said it may cut the debt rating of the US, warning there was a "rising possibility" it will default.

Uncertainty and concerns (fears) about the future cause the markets (which are free floating) to fluctuate. Since the supply of Gold is limited it has great 'store of value' (one of the measures/definitions that economists use to define money)

As the article further explains...

Gold is seen as the number one haven purchase in times of economic uncertainty, but analysts said its rise was also caused by the fall in the dollar, which makes the precious metal more affordable for holders of other currencies.

Taking market variability into account and the promotions to buy gold to a large number of consumers (such as Rush Limbaugh promoting gold through this page), the following analysis about a possible gold bubble makes sense...

Fareed Zakria: This is bizarre. A lot of it is simply scaremongering. The truth is that for two and half decades, between 1980 and the mid 2000s - gold prices actually declined. Unlike many other commodities which actually have an end use - oil, minerals - gold is just a symbol, and as such its price rises have to do more with psychology and emotion than reason. So, when it falls out of fashion, the price could really collapse. The next time you watch Goldfinger or you hear of the antics of a Hugo Chavez or a Donald Trump, be a little wary.

Gold isn't a stock with real earnings. It isn't a bond with interest payments. It isn't oil. It won't help you drive a car; it won't help you light a fire. Yes, you can wear it, but you can't eat it. If doomsday really arrives, a can of baked beans might be worth a lot more than a brick of gold.


Added October 28th 2011

Approx 4 mins - Stock volatility actually helps the traders. (This has to do with the variety of maneuvers at their disposal to make money on market fluctuations - Note: This does not include any big money players up to their own plans for better or worse).

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