Opening Position
November 2009
As we head toward the end of 2009, I have to wonder how the markets will finish the year. How likely is it that the optimism prevailing among many analysts these days will still be that way by the end of December? In spite of many reports cheering that the recession is over or at least getting that way, the consensus is that the rate of recovery will be slow. With that in mind, it is interesting to see how the markets evolved in 2009. After the markets hit a significant low in March 2009, the equity markets rallied very strongly, very quickly. During this period, the US dollar weakened, while we saw gold reach the sharp highs it hit in early 2008. The skyrocketing price has brought a lot of attention to gold and has resulted in several emerging markets increase their gold reserves. Does this mean that the US dollar may lose its status as the world’s reserve currency?
This growing interest in gold should not be ignored. Although emerging markets have been increasing their gold reserves, there’s still room for the price of gold to keep going up. At one time it was difficult for the retail trader to trade the metal, but that is hardly the case now and could have something to do with the strong, fast rallies we have been seeing in gold. It should come as no surprise that during uncertain times in the financial markets and facing a weak US dollar, investors are turning to the yellow metal. It has long been considered a safe haven as well as a replacement currency
One thing we are not seeing is an increase in the price of oil, which is a commodity that typically rises when the US dollar is weak. Clearly, the softening in the demand for oil due to the global recession is what is keeping those prices low. This will, of course, change when global economies start showing signs of growth, but until then, it won’t surprise me if all eyes stay focused on gold.
As long as the US dollar remains weak, you can expect to see strength in the commodity markets. The relation between these commodities, especially gold, and the US dollar is critical and gives you an idea of the underlying economic conditions. A switch in sentiment could be an indication of a reversal in the markets that could happen just as quickly and steeply as the rally we have seen since March 2009.
Jayanthi Gopalakrishnan, Editor