Gold Bubble Head Lines Were Premature

Although we all heard the Gold Bubble burst last week the fact is Gold posted a quarterly gain of 8 per cent, not a bad quarter, actually its biggest this year,the drop of 11 per cent for September did not mark a reversal.

Shayne Heffernan has said every investor should be holding some metals right now, long term metals are a valid hedge against inflation, and a short term crisis is a an ideal point to make your entry.

Gold futures for December delivery gained $US5, or 0.3 per cent, to settle at $US1,622.30 an ounce at 2:01 p.m. on the Comex in New York. The metal has gained 14 per cent this year, reaching a record $US1,923.70 on Sept. 6.

Thailand, Bolivia and Tajikistan boosted gold reserves by a combined 18.2 metric tons in August, valued at $US1 billion at the month's average price. Central banks are expanding reserves for the first time in a generation.

Copper Takes a Beating

Copper suffered a sharp sell of that ignored the fundamentals of the market, there will be a shortage this year and next, demand is not seen falling for the foreseeable future and there are significant supply issues with strikes and new legislation.

Dollar is Inflated in this Market

Taking an economic point of view, again long term, the US Debt level is too high, it is now unsustainable and we are yet to see a single government policy that will improve the situation.

While it remains true that the short term rush to safety has favored the USD, long term hat makes no sense at all and the market will correct should a real crisis occur.

The USD will suffer should a real crisis emerge as the strength of the currency is nothing but the price of that currency in terms of other currencies. In international markets, this price is decided just like the price of any other commodity in the market, by the relative demand and supply. If there are more buyers wanting to buy the currency relative to the amount of the currency available for supply by the suppliers of that currency, the price of that currency will rise, meaning thereby that the currency will strengthen. If, on the other hand, the supply of the currency exceeds what the buyers are wanting to buy, then the currency will weaken, meaning its price will reduce.

The demand for a currency is created by two factors, its exports that the others want to buy, or the investments that people want to make in that currency or assets denominated in that currency. So rising exports lead to rising demand of that currency and consequent strengthening of that currency. Greater capital inflows and investments within from outside have the same effect of increasing demand and strengthening the currency. The effects of falling exports or rising imports are the reverse - they reduce its demand and weaken the currency. Outflow of capital has the same effect.

The currency market is sensitive to both future expectations and speculators. If the economy of a country is not doing well, fewer people will wish to invest there, so the currency of that country will fall. On the other hand if, for some reason, people expect that the currency will fall, they will take their investments out, and so actually make the currency fall.

Given these are simple economic laws, metals make sense long term.


Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.