Gold is a most useful metal in Jewelery and other products like mobile etc.
AUSTRALIA IS MOSTLY known for koala bears, kangaroos and Foster's beer. The central bank in Sydney rarely figures prominently as a major actor in global financial markets.
Yet, the Reserve Bank of Australia's surprise decision to raise interest rates Tuesday set off a global surge in gold prices and provided new evidence that emerging economies will likely recover from the global credit crisis before developed nations such as the U.S. Australia increased rates 25 basis points to 3.25%, while U.S. rates remain between zero and a quarter percent.
Australia's decision created massive trading in gold options, futures, and stocks as a hedge against U.S. inflationary pressures and weakening U.S. dollar. Similar trading occurred in European and English markets where investors also fear a hangover from coordinated central bank efforts to stabilize the global economy after the credit crisis.
Indeed, Australia's rate hike, coupled with ongoing fears of Israel bombing Iran, may prove to be a milestone in how gold trades in the options market and elsewhere. By all accounts, gold has entered a new trading range that portends higher prices.
"No one knows how far gold prices will increase," a top options market maker said. "Remember what happened to oil last year? It kept powering higher and stocks surged as short sellers were taken out."
In the past, many traders reflexively sold short-term call options or used other trading tactics to profit from gold's inevitable loss of momentum every time it surged higher. Panic peak prices are typically followed by price declines because everyone has spent all of their money chasing gold higher, and they have nothing left to spend. But buyers remain active for gold and related companies even as the price of SPDR Gold Shares(GLD), the primary proxy for gold, was recently unchanged at about $102.
Real-world economic concerns, rather than trading tactics, seem to be increasingly weighing upon traders who want to own gold -- not trade it -- so that they can protect themselves against the inflationary effects of the U.S. Federal Reserve printing money to end the credit crisis.
Some options traders say there is now ever-present demand to buy gold as a hedge against macroeconomic and geopolitical concerns. In the past, options were primarily used to take advantage of gold's price swings, rather than as a tool to cost-effectively buy gold.
The persistent demand for gold is firmly reflected in the prices of options on SPDR Gold Shares.
The implied volatility of GLD's call options, which increase in value if GLD's price rises, are incredibly expensive. This reflects demand for bullish calls, and also shows the reluctance of market makers who are forced to sell calls into a powerful rally to maintain an orderly market. In normal markets, the price of out-of-the-money puts tends to exceed call prices. Why? Because investors tend to be more afraid of losing money, rather than missing an opportunity to make money.
That Australia figures so persuasively in this ongoing conversation about how the world recovers from the credit crisis will surprise many people. Australia, however, is a backdoor play on fast-growing Asian markets. Australia is rich in the commodities that Asia needs to propel its growth.
As economic expansion in major countries is expected to be modest due to the legacy of the credit crisis, Glenn Stevens, governor of Australia's central bank, said prospects for his nation's Asian trading partners appear noticeably better.
"Growth in China," Stevens said in a statement announcing the bank's rate hike, "has been very strong, which is having a significant impact on other economies in the region and on commodity markets."
For now, everything that is wrong with the world is reflected in the price of gold. As it seems those problems are not likely to subside anytime soon, traders say it is unlikely gold prices will significantly decline in the near future.