earth’s crust and is mostly mined by large global conglomerates. The barriers to entry in this business are enormous because of the huge cost involved in mining an ounce of gold. Discovering where there are gold deposits is a tough thing to do. As the costs of mining gold have increased, producers have been forced to come up with ways to boost their growth. In recent months, a number large consolidations have happened in the industry. For example, Newmont Mining has announced that it will acquire rival Goldcorp in a transaction valued at almost $10 billion. Its rival, Barrick Gold has just cancelled a hostile bid. Three years ago, Sibanye merged with Stillwater, and just last week, Australian-based Newcrest mining announced that it was acquiring a Canadian mine for almost a billion dollars.
The question around the world is why people invest in gold. Warren Buffett is famous for his hatred for gold. In 1998, he said this:
Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
This way of thinking is based on the fact that gold does not have any industrial uses. Indeed, most of the gold that is mined every year is bought and stored in vaults by central banks and large institutions. Only a small part of the metal is used in the manufacture of jewellery, medals, and ornaments.
The fact that gold does not have an industrial use is the biggest reason why most investors question its value. Another reason is that gold does not always do what is promised. Many investors believe that gold is a good hedge against a recession. However, historically, gold has not performed better when there was a recession.
Another fantastical reason is that gold is a viable metal to hold in case of an apocalypse. Holders believe that in case that happens, the people who will come out being successful are those who will have gold with them. They argue that fiat currencies like the dollar and euro will be worthless when it happens.
On the other hand you can’t eat gold (well you can but if it’s the only thing you eat you aren’t going to stay alive for very long), you can’t hunt with gold (maybe if you throw the ingots?) and you can’t wear gold to stay warm (you’ll leave a fabulous looking corpse though if you do attempt it). So even post-apocalyptic value of gold argument is debatable.
The argument in favor and against gold tends to be emotional with both sides being very passionate about it. It is almost impossible to change the minds of the two sides.
In all this, the fact that is difficult to argue against is that gold tends to move in the opposite direction as the USD. This is because gold is usually quoted in dollars. As such, when the USD strengthens, it usually leads to a weaker gold.
This week, the price of gold has risen sharply while the USD has weakened. This started after the last week’s weak jobs numbers from the United States. The economy added more than 20k jobs, which was lower than the 180k+ that traders were expecting. This was followed by the weak inflation numbers released yesterday. These numbers reinforced the Fed’s patient approach.
The XAU/USD pair has moved to above the 1300 level. This price is slightly above the short and medium-term moving averages. It is also the highest level since March 4. The pair could continue moving up to test the 50% Fibonacci Retracement level at 1315.
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