Gold Price is Tanking: Physical Commodities Not a Safe Haven?


Over the past few days, a very unusual set of circumstances has begun to reveal itself.

Ordinarily, in times at which a very influential national economy begins to show signs of potential catastrophe, many cautious investors tend to sell economy-dependent items such as company stocks or long positions on currency, and head for physical commodities such as precious metals.

Today, however, there is very clear evidence that a flight toward the usual array of valuable metal is not taking place this time. In fact, quite the opposite is happening.

Whilst the sensationalist journalism continues across the western markets surrounding the current debt situation in the United States in which millions of members of the public are provided with an apocalyptic view of a potential default on borrowing commitments by the United States government on June 1 this year if the debt reaches the debt ceiling and the debt ceiling is not able to be raised, calmness appears to be the order of the day across all areas of the markets.

Yesterday it became clear that the US dollar had gained remarkably against other major currencies, notably the British pound which itself has enjoyed substantial stability this year. That would perhaps signal the mood which many traders are now in, because a liquid asset such as a currency attached to a failing economy would be the first asset to depreciate.

The mere fact that the US dollar is not depreciating is perhaps indicative that the economy is not failing.

It is perhaps even more of a sign of calmness by traders relating to the potential default on US debt is that gold is not attracting major interest.

In fact, it is absolutely tanking in value.

Whereas a rush toward gold would be very normal in circumstances where the US government debt is heading for a potential default, the value of gold on the spot trading market has dropped by an astonishing 10 points in just one day.

As the US trading session drew to a close yesterday, gold went down to USD 1,957 per ounce.

Over the past 30 days, spot gold is down by over 25 points, which represents the entire period that the tabloid news on both sides of the Atlantic has been trotting out a tale of potential doom regarding the US debt situation.

Either investors do not consider that there will be much fallout from any potential default, or perhaps more likely, they do not consider that a default will happen at all, and all the hyperbole is just to worry the public, and a predictable ‘last minute deal’ will be rolled out at the end of May and all will be as normal, but with higher public debt and a larger ceiling.

This morning during the Asia Pacific trading session, gold failed in defending its immediate support of USD 1,970 and remained in the doldrums following last night's very low price at the US market close.

There is more concern about the US Federal Reserve's potential interest rate increases, which go against the announcements just over a month ago that the inflation in the United States is now stable and therefore no more interest rate increases would be on the cards for the foreseeable future. Now the Federal Reserve is looking once again at rate rises.

Stock indices such as the S&P500 made gains this morning in the Asian session, and the British pound is up against the US dollar. This all shows confidence in the US economy, and the dip in value of gold is a further indicator in that direction.

The question remains what will happen if the markets are betting on a ‘business as usual’ scenario on June 1 because of previous episodes of empty sensationalism and sudden ‘deals’, but the default actually goes ahead.

Should that happen, some volatility across all of these sectors is likely!

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This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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